History Says Your House May Not Be a Good Financial Investment

Many Americans have substantial portions of their net worth tied up in their place of residence. While housing brings benefits both tangible (a place to sleep) and intangible (a sense of belonging to a community), one thing it has not historically offered is solid capital gains appreciation.

That's what one of the leading experts on U.S. housing, Yale professor Robert Shiller, told me last week when I interviewed him in front of a live audience at Motley Fool Headquarters. Shiller, author of the new book Finance and the Good Society, explains why in the video below. (Running time is 1:44; a transcript is provided below.)

Brian Richards: How do you think we should be thinking about the purchase of a home? Is a home an investment?

Dr. Shiller: Well a home is definitely an investment in the sense that for most people it's the main part of their wealth, and it's something that they might rely on if there's an emergency. You could sell the house and pay for something that's more important to you. But the question whether it's an investment may have another nuance to it. The question is, is it a good investment in the sense that it will return you financially.

Now the thing is that a lot of the benefits you get from housing are in kind. That is, you can live there. You might like it or you might not, right? We're all different, so it's not like other investments that are fungible, that you can measure; it's different for different people. But you can measure the capital gains part of housing. There's also a tax advantage that might be removed, by the way, but currently there is a tax advantage to home ownership.

But the capital gains component I think is overrated. Because my data show that from 1890 to 1990, 100 years, there was virtually no real inflation-corrected appreciation in home prices. And I think those people in 1990 should count themselves as lucky that they ended flat, even, because it could well have gone down.

There's no guarantee that home prices are going to go up. I think we've gotten into an illusion about that.

For more insights from my talk with Robert Shiller, see:

Brian Richards is the managing editor of Fool.com. Follow Brian on Twitter: @brianlrichards.


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  • Report this Comment On April 11, 2012, at 3:31 PM, rossirina wrote:

    I understand that we should have a relevant home for our budget and play it smart when it comes to the amount of leverage we take.

    But altogether, keeping aside the potential increase of the market value of our home, we should look at the broad implications of real estate investments including: 30 years fixed mortgage provides you a protection against inflation, the ability to refinance allows you to always improve and lock your mortgage on a low interest rate, the tax benefits offered by Uncle Sam, and more.

    I found additional insight here: http://www.planandact.com/Public/Info_HiddenCosts.aspx

  • Report this Comment On April 11, 2012, at 3:46 PM, daveandrae wrote:

    Someone once asked Warren Buffett if buy and hold equity investing was dead.

    His answer?

    "It depends on what you're buying and holding."

    I put 26% down on my house in May of 1998. My neighbor's house, two doors down recently sold for 35% more than what I paid for mine. The average price for a home in my neighborhood is 26% more than what I paid for mine. Thus, if I decided to sell, today, the capital I invested in my home has been appreciating at an annualized rate anywhere between 4-6% since 1998.

    This compares to less than 4% annualized rate of return from the s&p 500 over the same time period. (May 1998- April 2012)....and the dividend portion of this return was taxed, at a rate of at least 15%, annually.

    My best friend put less than 3% down on a 297,000 house at the peak of the housing boom. Like many other Americans, he subsequently went through a divorce, bankruptcy, and ultimately, foreclosure over the 2008-2010 time period.

    That house recently sold for 87k.

    Obviously, he lost his entire investment.

    Two people.

    two very different results.

    Once again, there is absolutely, positively, NO correlation between "investment performance" and Investor Return. In fact, the two are wildly diametrical.

  • Report this Comment On April 11, 2012, at 5:34 PM, hydeparker54 wrote:

    In determining the value of owning real estate, it is important to consider how much rent you'd be paying for a similar place to live; subtract that from your mortgage and maintenance costs. Not often mentioned is the permanence of owning. People who rent are often asked to move at someone else's convenience, as when the property is sold. It's happened to me, and it was not fun.

    If, after reaping those costs and benefits, you find your home value keeps up with inflation, then it's doing better than many other investments. I hardly need add that it's really important to have a "nose" for the time to buy and the time to move on, for demographics and bubbles. I'll boast that I've hit those markers pretty well.

  • Report this Comment On April 11, 2012, at 6:52 PM, Bonefish100 wrote:

    And, as newer homes become more scarce because of increased government-related fees, you will see owner-occupied homes become more expensive, rentals become more scarce, and rents will continue to increase.

    If nothing else, owning a home represents forced savings, unlike renting.

  • Report this Comment On April 11, 2012, at 7:40 PM, xetn wrote:

    FWIW, housing was never thought of as an "investment" except as a rental property (something that generated income). Rental property was a business. Living in one's house, whether owned or rented was a "cost of living" expense. Housing is really a depreciating asset.

    Housing really became an "investment" in the 60s, which, due in large part to the Viet Nam war featured relative high rates of inflation and people turned to housing as a natural investment (hedge against inflation).

    The housing bubble exemplified the last fool investment, with the crash taking out a sizable number of "investors".

    My criterion for home purchase either as a place to live or as a rental property.

  • Report this Comment On April 11, 2012, at 7:46 PM, TMFBrich wrote:

    @xetn,

    Great point. In another segment of my Shiller interview -- to be published tomorrow or Friday -- I ask him how Americans collectively fell into the belief that housing is a great investment (which he called an illusion). Part of his answer: "How did we get this idea that home prices only go up? There are a number of elements of it. I don’t know where to start. One of them is that we had a lot of inflation."

    I'll post the link here once that story has been published.

    Thanks for reading,

    Brian Richards

  • Report this Comment On April 11, 2012, at 8:34 PM, joeblou wrote:

    Dont quit after the fall remember buy hi sell low or what I do in the market.

  • Report this Comment On April 11, 2012, at 9:12 PM, LifeStar1 wrote:

    The Author is "absolutely right" about the idea of that purchasing or owning a “House is Not Necessarily a Good Investment” EXCEPT that a house could provide permanent residency for the homeowner and yet “it is a long-term financial and mental burden” for the homeowner while making mortgage payments for decades after decades assuming that people have sufficient funds to pay for the mortgages!

    It is also true that many people live in America “bought the unhealthy illusion that owning a house is the most important and only criteria for living the American Dream” when in fact there are many things that “we as human beings could and ought to do and invest in” in order for us to fulfill our authentic and important missions, visions, and goals in being “a true American and a true contributive human being of Planet Earth” rather simply purchasing or owning a house!

    For example, being an investor in the stock market is contributing to the economy and to the country as a whole because the funds in your investment portfolio not only helped you to earn money GIVEN IF you are investing in the right and less volatile stocks, but also helped the corporation you invested in; and in turn helped the company’s employees in maintaining their wages or salaries which somehow is equivalent to contributing to the economy and to the country as a whole because of your investments in stocks! So, the bottom line is “living the authentic American dream” is not merely about ourselves nor our own motives or gain, but it is also “about our fellow human beings, our community, and our Planet Earth” that DERIVED from our due diligence, good intention, integrity, commitment, and honor to our Planet Earth and to Humanity!

    Sincerely,

    LifeStar

  • Report this Comment On April 12, 2012, at 12:58 PM, akutach wrote:

    Daveandrae,

    The limited numbers you provide in your analysis are only enough to tell that you're not being honest with yourself in assessing the real return on your home 'investment'.

    It is a problem that people conclude their housing return is great only after ignoring that they are leveraged (loan:equity of 3:1 in your case) and costs such as upkeep, taxes, additional insurance, commission and transfer tax on sale of the home. Leverage the S&P returns by 3:1 and then resolve the sale of your home after transfer taxes and commission and you'll probably find the outperformance is very limited if present at all.

    It's not clear if you used CAGR or averaging, but always evaluate by CAGR. Averaging makes returns look relatively good over long time periods To be honest with yourself, use CAGR.

    I owned a home from 2001 to 2007 and net of all expenses, had a CAGR of 18%, but if I had leveraged the S&P500 during that time at 4:1 as I had my house, the returns would have been 15% CAGR. I rode the edge of the once-in-a-lifetime housing bubble and got off just in time, but still had just comparable performance to an index fund. I'm not bragging, as I know that luck and circumstances guided my timing - not investment thesis.

  • Report this Comment On April 12, 2012, at 1:01 PM, Harker207 wrote:

    As a homeowner in a very expensive market (NYC), I tend to look at my purchase more as a way of fixing my housing costs indefinitely, as opposed to watching them increase every single year. The tax breaks are great too. But I would never delude myself into thinking I can retire off of the "wealth" in my "investment".

  • Report this Comment On April 12, 2012, at 2:29 PM, NotJesseL wrote:

    I am surprised nobody has mentioned the forced savings aspect of home ownership. Some people won't save but will pay on a mortgage, giving them equity over the long haul. Not a great investment necessarily, but it can be helpful at retirement.

  • Report this Comment On April 12, 2012, at 11:29 PM, Houston71 wrote:

    Having just sold my house after eight years and buying another, whether it is a good investment or not is all timing. I'm not interested in the investment return, because I am selling my house at the bottom (or close to it) and buying another in the same state, and I see housing as a living expense. I "earned" .95% annual growth on my home, (but really lost because I put way more in for capital expenditures). But that's fine. I lived in my home, enjoyed it, and didn't come out financially worse off. My mortgage was about $1,400 with PITI. I could have rented for the same, but I enjoyed the freedom of ownership.

  • Report this Comment On April 12, 2012, at 11:33 PM, TMFBrich wrote:

    And here's another segment of my interview with Shiller, in which he discusses how we fell under the illusion that homes were great capital-gains-generating investments: http://www.fool.com/investing/general/2012/04/12/the-illusio....

    Thanks for reading and commenting, everyone.

    -Brian Richards

  • Report this Comment On April 13, 2012, at 10:41 AM, daveandrae wrote:

    akutach-

    "The limited numbers you provide in your analysis are only enough to tell that you're not being honest with yourself in assessing the real return on your home 'investment'...."

    I read your post three times and I still have no idea what this means, or any idea as to what you're talking about.

    My net worth, at the time I purchased my home in 1998 was roughly 70k. Today, fourteen years later, my net worth is roughly 440k. Same guy. Living in the same house.

    This stuff is just not that complicated.

    Live within your means-Acquire appreciating assets- don't use leverage.

    Nuff said.

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