Americans vs. Reality: Why Your Home is Not a Good Investment

I've come to believe that for millions of Americans, a house is a large liability masquerading as a safe asset.

Not just because of the recent housing crash, although what an eye-opener that was.

But because after watching real estate implode last decade, the average American still believes their home will make a great long-term investment. The best long-term investment, even. 

As my colleague David Hanson wrote last week, a recent Gallup poll shows that Americans now believe housing is the best long-term investment, beating out stocks, bonds, and gold. 

They might be right, only because the average stock investor does so poorly that a home may indeed be their best investment. But housing has historically been a terrible bet for people who think it will return more than inflation. To show you what I mean, I have to tell you about my visit to Yale economist Robert Shiller's office a year ago. 

Shiller -- who won the Nobel Prize last year -- is regarded as the world's foremost housing expert. He has married historical data with deep insight into human psychology to offer some of the best housing analysis anyone's ever produced.

Not only is Shiller brilliant, but he's one of the nicest guys I've ever met, easy to talk to and puts things in clear, easy-to-understand language. As we sat in his office eating donuts and drinking coffee, I asked him, in the broadest terms I could, what homeowners should expect out of their homes in the long run.

"The housing boom in the early 2000s was driven by a sense that housing is a wonderful investment. It was not informed by good history," he said. Most people now agree on that much.

"If you look at the history of the housing market, it hasn't been a good provider of capital gains. It is a provider of housing services," he explained.

By that, he means a home gives you a place to live, a place to sleep, a place to store your stuff.

But that's it. Americans believed -- and still believe -- that the value of their home will increase above the rate of inflation.

And that, Shiller says, is wrong.

"Capital gains have not even been positive. From 1890 to 1990, real inflation-corrected home prices were virtually unchanged."

Shiller -- a pioneer of behavioral finance and one of the calmest, levelheaded economists I know -- becomes animated at this point, almost irritated. Debunking the notion that housing is a great investment is one of his favorite topics.

Housing prices, he argues, could decline over long periods of time -- decades, even.

"Why is that?" he asks me. I really don't know.

"Well, I think you have to reflect on the fact that it's done it before. Home prices declined for the first half of the 20th century [adjusted for inflation]. Economists discussed that back then. Why are they going down? The conclusion was ... of course home prices go down. There's technical progress. They are a manufactured good. Back in 1900, homes were handmade, you know, craftsmen. But now, in 1950, we can get all kinds of power tools and prefab. And [construction workers] were just better in 1950 than we were in 1900. So of course prices will go down."

Shiller also mentions that certain homes go out of style over time, dragging down prices. "What kind of houses will they be building in 20 years?" he wonders aloud. "They may have lots of new amenities. They will be computerized or something in some way that we can't anticipate now. So people won't want these old homes."

His animation peaked with a line I'll never forget.

"To me, the idea that buying a home is such a great idea is just wrong. They may very well decline for the next 30 years in real terms."

Real home prices may decline for the next 30 years.

The best thing about Shiller, and what sets him apart from your typical pundit, is that he has data to back up every point he makes.

In the early 2000s, Shiller wanted to see what nationwide home prices looked like over the long term. He was shocked to learn that no one had ever actually put that data together.

He dug around in libraries, crunched the numbers, and came up with an index that measured nationwide home prices going back to the 1890s.

This was a first. "The strange thing is, nobody else had ever made a plot like that. I can tell you, no one had ever seen that picture," he told me, shaking his head in disbelief. "People plot all kinds of data. Why wouldn't someone have done that? I still haven't figured it out."

The chart, measuring nationwide home prices adjusted for inflation, was this one:

From 1890 -- just three decades after the Civil War -- through 2012, home prices adjusted for inflation literally went nowhere. Not a single dime of real growth. For comparison, the S&P 500 increased more than 2,000-fold during that period, adjusted for inflation. And from 1890 to through 1980, real home prices actually declined by about 10%.

The reason Shiller warns that home prices could fall going forward is the simple observation that, heck, they've done it in the past. It's what history tells us to expect out of our homes. The entire idea that home prices increase in real terms over time is a figment of the 2000s housing bubble.

It's important to reiterate what a home does do: It provides a place to live. A place to raise your kids. A place to spend the holidays with your family. A place to barbecue with your neighbors. Even a place to rent out. That has tremendous value, of course. Shiller owns a home. He'd buy another if he needed one. "Basically, if I were in the market right now because I wanted a house, I would buy a house," he said.

The problem is that Americans expect more out of their homes than just a place to live. In 2010 -- years after the housing bubble burst -- Shiller's surveys showed Americans still expected their home to appreciate by more than 6% a year over the following decade. If history is any guide, that's probably about twice as fast as they'll actually appreciate by. Despite the housing crash, people still expect stock-like returns out of their homes.  

Since a home is most Americans' largest asset, you can see how this becomes a problem. When you have inflated expectations about the largest asset you own, you walk down the path of financial disappointment. The value of American homes fell by nearly $7 trillion from 2007 to 2011. People who thought their homes would return enough to pay for retirement learned that Mr. Market carries a sledgehammer and takes no prisoners. 

Everyone should live in a home they can afford and provides the lifestyle they desire. But assuming it's a superior long-term investment, one to rival stocks, is dangerous. There's just no evidence backing it up. 

I think people run into two problems when thinking about the value of their house. 

A home is typically the asset people hold the longest. They sell stocks after a few months, but keep a home for years, or decades. When you own something for that long, the returns you think you earned can be overwhelmingly due to inflation. The Consumer Price Index has increased six-fold since 1970. If you bought a house for $30,000 in 1970 and it's worth $180,000 today, you've earned nothing after inflation. You think you've made a fortune, but you haven't gone anywhere. Add in property taxes, insurance and repairs, and you're down. 

Yes, you got to live in the house. That's huge. But it doesn't make living free.

If you have a mortgage, you're paying interest. If you own outright, or have a lot of equity, there's an opportunity cost of having money tied up in an asset that barely keeps up with inflation when you could have had it in something else, like stocks.

Say you and I both have $250,000. I buy a house for $250,000 cash, and you rent a house across the street for $1,000 a month and put $250,000 in the S&P 500. After 20 years, I'll have a house worth $200,000 in real terms, and you'll have a portfolio of stocks worth $330,000 adjusted for inflation (assuming the market's average real rate of return, and a 2% inflation rate on my rent payments). The difference between those two amounts is the opportunity cost of owning a house (and I didn't even include taxes, repairs, or insurance). In reality, it's hard to rent the same house for 20 years straight, and a lot of regions don't offer attractive rentals at all, so this probably isn't feasible. But it shows that the decision to own can be more about lifestyle and stability, not financial returns. 

So, by all means, own a home. Just keep your expectations in check. 

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics. 

 


Read/Post Comments (52) | Recommend This Article (122)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 02, 2014, at 11:57 AM, ejprzybylski wrote:

    Morgan,

    Love your stuff. Your rent/own comparison shows a compelling argument as to why renting may be beneficial to owning in some cases. However, the opportunity cost comparison falls apart pretty quickly when the assumption is made that the "owner" side will be taking out a mortgage and claiming tax deductions. Rather than your $250,000 avoided cost be going into the market in year zero for the renter, the renter will instead will be allocating into the market just the premium the home owner would be paying over the renter for taxes/repairs/insurance. What's more, any such "owner's premium" is eroded over a decade or so as rents increase while mortgage payments stay the same.

  • Report this Comment On May 02, 2014, at 1:01 PM, DirtyTomRackham wrote:

    But what about leverage? Very few people are buying houses with cash.

    If I buy a house for $100,000 and finance 90% and pay 10% in cash, and then sell the house years later for $110,000 (after commissions, etc.) I haven't made a 10% return on my money, I've made a 100% return.

  • Report this Comment On May 02, 2014, at 2:24 PM, kyleleeh wrote:

    <<If I buy a house for $100,000 and finance 90% and pay 10% in cash, and then sell the house years later for $110,000 (after commissions, etc.) I haven't made a 10% return on my money, I've made a 100% return.>>

    That's the same logic people used back in 05-06. The problem with ANY leveraged investment is that it works both ways. If the value of that house drops 10% you have suffered a 100% loss.

  • Report this Comment On May 02, 2014, at 3:00 PM, DirtyTomRackham wrote:

    I recoginize that a drop is a real possibility as well. I don't think of my house as anything but a place to live that I rent each month, much like a car is nothing more than a way to get around so I'm not putting my eggs in that basket. In 20-30 years I'll have a debt free asset with a value to be determined.

    But the example of $250k isn't realistic.

    "Say you and I both have $250,000. I buy a house for $250,000 cash, and you rent a house across the street for $1,000 a month and put $250,000 in the S&P 500. After 20 years, I'll have a house worth $200,000 in real terms, and you'll have a portfolio of stocks worth $330,000 adjusted for inflation "

    Except the house owner will also have extra cash flow for 20 years (since he bought his house for cash) that they can invest over that 20 year period.

    I completely agree with the concluding sentence, but I don't think it's really that great of a difference as it's being laid out here.

  • Report this Comment On May 05, 2014, at 12:44 PM, Han wrote:

    I respect most of the information this website offers. However, this article left out half the information and made the comparison grossly inaccurate. For example, the person who bought a home for $250k cash, he/she would have (for simplicity sake), $1,000 per month for 20 years to invest in the SP 500. At a rate 2% annual rate of return and $12k per year ($1k per month x 12 months), you would have $297k after 20 years AND a house worth $200k (compared to a portfolio of $330k). I neither advocate renting nor buying; but as a reader, I would love to see accurate reporting (your editor should have caught this error).

  • Report this Comment On May 05, 2014, at 2:52 PM, 45ACPbullseye wrote:

    @Morgan, I tend to agree with @Han above. In fact, owning a home gets even better when you factor in the mortgage interest deduction. The money saved by this can be invested in other asset classes.

    The tax code also helps shelter gains upon sale if your home was a primary residence. The sale of stocks does not have that nifty advantage. Best, Bill

  • Report this Comment On May 05, 2014, at 2:52 PM, TMFHousel wrote:

    test

  • Report this Comment On May 05, 2014, at 2:54 PM, TMFHousel wrote:

    Thanks for the comments.

    In the example the renter pays his rent out of the $250k, so it's apples to apples.

    Regarding the mortgage interest dedication, only about 1/3 of homeowners who pay interest benefit from the deduction because they take the standard deduction rather than itemize. Also, Roth IRA does indeed protect stock gains from taxation.

    Thanks again,

    Morgan

  • Report this Comment On May 05, 2014, at 3:00 PM, TMFHousel wrote:

    For example, the housing tax shelter only applies to $500k for married couples. If you max out a Roth for 20 years or more you should have much more than that in sheltered gains from stocks.

  • Report this Comment On May 05, 2014, at 3:03 PM, millerab78 wrote:

    Real Estate is a local market, I don't think I would invest in San Diego right now, but there are plenty of locations that offer great cash flow opportunities.

    There are many reason's why housing is a fantastic investment. For one, it is a poor man's way of building cash flow. I can buy a house for $30,000, put $5,000 into fixing it and rent it for $9,000/yr($750/month). After taxes and insurance and management, I would have $6,600 cash flow every year. I can also pull out my investment after a year of seasoning and my cash flow will be about $4,000/year, but I will not have any money left in the investment, so essentially $4,000/year with a potential for the value to go up(and also down) with time. If I want to 'save' money for my kids college, I could buy a duplex or triplex for $150,000 and get a 15 year loan when my kid is 3. I could put down $15,000 and pay off the mortgage in 15 years with the tenants rent and have it paid off and sell the building when my kid is going to college. Over the 15 years I would make much more positive cash flow than the $15,000 investment to buy it in the first place and I could contribute a large sum of money to my kids college for essentially none of my own money.

    I personally invest heavily in the Real Estate market and feel that it is the best investment out there. (Especially over the past 2-3 years). I admit it is getting harder to find really good cash flow deals, but they are out there. I think it is much harder to find the same type of returns in the stock market. Plus, I can actually improve the house if it makes sense. Almost every house I buy needs $5-10,000 in repairs. Once they are ready to rent, in my opinion, they make fantastic investments.

    I also don't think it is always a good investment, but right now there are still pretty good deals out there. From 2006-2009, I didn't buy one house. I only buy for cash flow though and there wasn't anything out there that I could find that would give me monthly cash flow. From 2009 until now, the deals have been once in a lifetime opportunities. They are still out there, but I don't know for how long and they are harder to find.

  • Report this Comment On May 05, 2014, at 5:43 PM, jimmd wrote:

    The problem in many comparisons of investing in the SP 500, and in local real estate is that the real estate investment is usually highly leveraged, and the stock investments aren't.

    You can buy a house with 20% or less down. All cash is very unusual for homeowners.

    Journalists don't describe the leverage and this is why so many recent articles in the Wall Street Journal and the Washington Post lately are bunk.

    Also, the press doesn't have the resources to drill into local markets. Coastal Ohio and coastal California might as well be in different countries. I spent happy years in Cleveland but shrinking cities are not appreciating.

  • Report this Comment On May 05, 2014, at 6:18 PM, TMFHousel wrote:

    Leverage an asset that historically grows 2% a year with a mortgage at 3% to 5% and magic does not happen. Also, as others have pointed out, leverage works in both directions.

  • Report this Comment On May 05, 2014, at 6:26 PM, TMFHousel wrote:

    <<All cash is very unusual for homeowners.>>

    "Nearly a third of homeowners — 29.3 percent of them — do not [have a mortgage], according to a recent analysis by the real estate site Zillow."

    http://bucks.blogs.nytimes.com/2013/01/16/owning-a-home-mort...

  • Report this Comment On May 05, 2014, at 6:26 PM, TMFHousel wrote:

  • Report this Comment On May 05, 2014, at 6:59 PM, TMFHousel wrote:

    I do, though, find it fascinating that after real estate leverage cost Americans $7 trillion, so many commentors are quick to point to the benefit of leverage when buying real estate. Probably a good sign that we'll keep repeating this cycle.

  • Report this Comment On May 05, 2014, at 7:56 PM, mrspeabody wrote:

    Owning a house should be considered an adjunct to a good investment plan. How nice to be retired and have no rent or mortgage payment! Even before it's paid off, after 10 or 20 years my mortgage payments with taxes and insurance were 1/2 or less than renting a comprable home.

  • Report this Comment On May 05, 2014, at 10:50 PM, StevenJonKaplan0 wrote:

    If you are one of the minority of homeowners who actually stay for the full term of a 30-year mortgage, then it can be more favorable than renting. However, the average American moves every 7-1/2 years. If you have a 30-year mortgage and you move after 7-1/2 years, then you have paid off only a tiny amount of the mortgage balance because of amortization. Almost all of your payments during those years are pure interest, and even if the interest when combined with other expenses qualifies as itemized deductions on Schedule A--which for many is invalidated because it doesn't exceed the standard deduction--you will come out far behind especially after counting taxes, repairs, and renovations. In addition, the transaction costs for houses are enormously higher in percentage terms than for stocks, bonds, or mutual funds. The author's point about housing being inferior to most liquid investments is absolutely correct.

  • Report this Comment On May 06, 2014, at 10:19 AM, axz055 wrote:

    I don't think the numbers used in the rent vs own comparison are very realistic. Where are these housing markets where you can rent the equivalent of a $250k house for $1000/month?

    If you had a 30-year mortgage with a great interest rate and 20% down, you'd probably be paying about $1000/mo just in the mortgage payment, not including property taxes, insurance, and maintenance. So if you could get a rental for $1000, you'd probably be stupid not to rent, regardless of whether you're paying cash or borrowing.

    But in my neighborhood at least, $1000/mo in rent won't get you anywhere close to the equivalent of a $250k house. To rent something with approximately the same size, you'd need to spend around $1600/month. At which point you're probably spending more in rent than your investments are earning.

    Or, alternately, you could buy the equivalent of a $1000 rental.This would leave you with a house and $75k left over to invest. Which, after 20 years of 7% returns would be worth over $300k (since you're not pulling $12k+ in rent payments out of it every year) and you have a house worth $140k or so.

    Of course, this still generally agrees with the premise of the article, which is that a house is a poor investment. But spending a lot on rent isn't good either. So I think looking at it in terms of renting vs. owning isn't very useful. The key line from the article is probably: "Everyone should live in a home they can afford" because every dollar put into a house or rent is a dollar that could be invested better.

  • Report this Comment On May 06, 2014, at 10:33 AM, TMFHousel wrote:

    <<Where are these housing markets where you can rent the equivalent of a $250k house for $1000/month?>>

    The United States of America.

    The average nationwide rent was $1,048 in 2013 and the average home cost $255,000.

  • Report this Comment On May 06, 2014, at 10:56 AM, only1ferret wrote:

    Great! I'm glad my ex-wives got stuck with the houses. I feel much better now!

  • Report this Comment On May 06, 2014, at 11:08 AM, Value216 wrote:

    -Historical data shows that the stock market outperforms real estate.

    -Even when you own your home outright you still have to pay "rent" in the form of property tax, insurance, and maintenance.

    -When you rent, your landlord takes care of the maintenance for you. mowing lawn, shoveling snow, toilet repairs, etc. --if you own your home, it's not fun.

    -When you own your home, you're not very portable and your money is not liquid. like if you got offered a job that required relocation, it would create complications that make it difficult to move. A lot of houses have been known to sit on the market for 2 years.

  • Report this Comment On May 06, 2014, at 11:48 AM, FutureMonkey wrote:

    I am both a happy home owner AND in total agreement with Morgan. Primary homes are a place to live, but are not an "investment" the way most people mean "investment" -- putting capital at risk to acquire an asset with the goal of producing income or appreciating in financial value.

    We can argue about the finer points, ad nauseum but the larger picture is that a person with the goal of financial needs to be diversified in their investments and not put so much of their extra income during their working years into their primary home, expecting it to out produce other asset classes. Don't borrow more than 2x your annual income towards your primary home. If you want to invest (put capital at risk in real estate get a more liquid asset like a REIT or look at corporate, industrial, retail spaces that produce income. Personally, I wouldn't put capital at risk in real estate without a specific goal of exceeding 10% return.

    FM

  • Report this Comment On May 06, 2014, at 11:53 AM, Sheep2 wrote:

    Although this article is interesting it is a broad picture of the US housing market. But it's not taking into account location. Yes, if your house is in the suburbs of a suburb of some unknown city, your house will not appreciate much. If the property is in a highly desirable place it will outpace inflation.

    To say that the housing market is not a good investment is not true. In the same way that one has to pick good companies in good markets run by good people, the same applies to real estate. The key is to find an under appreciated property in a great location in a great city and you will destroy inflation may times over.

    I work in real estate and have spent a lot of time doing commercial site selection, and companies look for certain criteria to establish desirable retail locations. The same should be true for housing, with different criteria. If there is a reason you are skeptical about the house and you can't change that issue, then know that any future buyer will have the same reservations, and that will bring down the price of your home.

  • Report this Comment On May 06, 2014, at 11:56 AM, dackerman21 wrote:

    Good article.

    Here's my view.

    You should BUY a house:

    1)You plan to live in it for at least 7 years

    2)When we are NOT in a housing bubble

    You should RENT a house:

    1)You plan to live in it for less than 7 years

    2)When we are in housing bubble

    You should PAY 100% CASH for a house:

    1)Never

    You should PAY OFF YOUR 30 YEAR MORTGAGE early:

    1)Never, unless your interest rate is over 7% (a 30 year mortgage is cheap money.....you are much better off using your excess to cash to try to make more than the % on your mortgage)

    Those are good basic rules. I'm amazed that so few people follow these rules. I'm even more amazed how people think that having no mortgage on their house is a good thing. It is "dead money" if your house is paid off.

  • Report this Comment On May 06, 2014, at 11:59 AM, axz055 wrote:

    <<The average nationwide rent was $1,048 in 2013 and the average home cost $255,000. >>

    But that doesn't mean that the average rental is equivalent in size/amenities to the average house. On average, renters have a lower income, which means that presumably, they're living in a smaller house/apartment. The average house in 2010 is over 2100 sq ft. The average apartment is less than 1000.

    Just to make sure my area isn't abnormal, I looked in other regions as well. In San Diego, $1000/mo in rent will get you 400-500 sq ft. Excluding foreclosure sales, $250k can buy a house almost double that size. In Des Moines, $1000/mo will get you 800-1100 sq ft in a rental home or apartment. But $250k can buy a house upwards of 1800 sq ft.

  • Report this Comment On May 06, 2014, at 12:09 PM, deckdawg wrote:

    Real estate agents are the main force that perpetuates the myth that a house is a good investment. "Buy the most house you can possibly afford" has been the motto of every one I have ever dealt with.

    Some one posted that real estate was a good investment, ie., buying houses, fixing them up, and renting them out. That is completely different than imagining that the house you live in is a good investment.

    And, yes, real estate is a very local market. So, those few cases in which a certain location has increased rapidly in land value (due to zoning, development, lack of room for development, etc.) provide misleading anecdotes to support the myth that a house is a good investment.

  • Report this Comment On May 06, 2014, at 12:23 PM, aldwords2014 wrote:

    I believe that buying a house IS a good investment for most people right now because of the way mortgages allow you to leverage your money. If you put 20% down and your home's value goes up 3% in the first year, then that is a 15% gain on your down payment. Meanwhile, your mortgage payment is probably about the same as your rent would have been.

  • Report this Comment On May 06, 2014, at 12:57 PM, bamasaba wrote:

    I was going to post something about how the rent vs. buy comparison in this is really misleading, but then I read ajzaddac's comment and he covers it. There is no way you could rent a $250 K home for $1000 a month, no way. It would probably be at least $1400, maybe as much as $1600.

    And no Morgan, just because the 'average' home purchase price and 'average' rental prices are $250K and $1000 respectively does not mean that you can rent a $250K home for $1000. The sample sizes between the average home and the average rental are definitely different.

    So, this article makes a really good point and a really misleading point. Yes, a home purchase is not a retirement engine. No, renting is not going to save you a ton of money in comparison to buying a home. Of course, if you buy a new home every 5-7 years, the transaction costs will kill you and a renter living in the equivalent properties would do much better.

  • Report this Comment On May 06, 2014, at 12:59 PM, bamasaba wrote:

    In my previous post I meant to say that the samples, as opposed to sample sizes, between the average home and average rental vary greatly.

  • Report this Comment On May 06, 2014, at 1:21 PM, FundamentalsMan wrote:

    Huh, I like this article but is seems to be recycled from one I read some weeks ago. Perhaps there was something new but I don't think so. I think it was word for word the same article under a different title.

  • Report this Comment On May 06, 2014, at 1:30 PM, kyleyounggun wrote:

    Many have made millions / billions off Real Estate and Stock or the combination of the two. However, Real Estate depends on location, location, location, and timing …

    A few examples and experiences:

    1. My wife’s Grandparents bought their house in California (Los Angeles to be exact) 50 years ago for 65,000 dollars. They sold it a year ago for 1.7 million and moved to Texas and bought a very nice house on the lake and retired in cash. I’m not sure what rate of return this is after inflation and after the location switch, but they were able to find a luxury house on the lake. A huge upgrade compared to their 2,300 sq ft house in California.

    2. I have two rental homes one in San Antonio, TX and one in Plano, TX. I bought these homes 3 years ago with cash. Both homes have increased in value by 20k per the appraisal district, and I could sell them for 30k over the purchase price tomorrow. In addition, they also provide an additional 4.5k monthly and 54k annually of free cash flow before repairs, insurance, property tax and tax breaks.

    My point is… Location is key and timing is key… I think in some locations like Dallas, Texas, and Huston, Texas inventory levels are low, demand is our pacing supply, and single family homes are cheap. We could be heading towards a housing bubble in Texas over the next 5 years. If you time it correctly! I think you could easily beat the market if you dump your money in Real Estate.

  • Report this Comment On May 06, 2014, at 2:09 PM, kyleleeh wrote:

    @kyleyounggun

    Do have any idea how filthy rich your grandparents would be if they put 65K in an S&P index 50 years ago?

    My main reason for not wanting to buy a house is that I have never been able to make any accurate predictions about how the events in my life would unfold over the next 5 years. I think unemployment in this last recession could have mitigated if so many people had not been immobilized by homes that they could not sell. Many construction workers out here in California who were unemployed for 3+ years could have easily gotten jobs in North Dakotas oil fields if they had the option of moving. To me that's the real cost of owning....chaining yourself to one regions economy.

  • Report this Comment On May 06, 2014, at 2:10 PM, TMFHousel wrote:

    <<Do have any idea how filthy rich your grandparents would be if they put 65K in an S&P index 50 years ago?>>

    The answer is $5,545,254.13

  • Report this Comment On May 06, 2014, at 2:11 PM, TMFHousel wrote:

    <<Do have any idea how filthy rich your grandparents would be if they put 65K in an S&P index 50 years ago?>>

    The answer is $5,545,254.13

  • Report this Comment On May 06, 2014, at 2:31 PM, kubrick007 wrote:

    Kind of surprised at the comment section considering this is an investment site.

    It really comes down to rent vs sale price, which varies by location. If you have an option of buying a house for $250,000 vs renting for $500, it is generally a fairly easy decision to make. If you could buy a house for $250,000 or rent it for $3,000, the decision is also easy. Somewhere in the middle is a good place to buy depending on your investment skills.

    I see a lot of people up there saying that you can't rent for $1,000 what can be purchased for $250k. Yet in Manhattan, I'm renting something for $5,000 that would cost me $2m to buy (and then still pay $3,000 per month in co-op fees). To put these in terms as above, I'm basically renting something for $250 that could be purchased for $250k...fairly easy decision for me to make to rent.

    Finally, to the person above who said in certain areas you can easily beat inflation, please study more math. Although it's true that Manhattan and San Fran are experiencing booms, these will be short-lived. In the long-run, it is extremely difficult for the housing market to beat inflation; this should be intuitive.

  • Report this Comment On May 06, 2014, at 3:15 PM, daveosome wrote:

    Great article - reminds me of the way most articles on the free site used to be, back in the day. Well researched, engaging, and detailed.

    Dave

    (off to walk 5 miles uphill both ways in the rain to get a quart of milk)

  • Report this Comment On May 06, 2014, at 3:17 PM, bookz wrote:

    The beauty of a home purchase isn't that the value of your equity might go up but that, with a fixed rate mortgage, you are locking in your housing costs over the long term, and repaying your mortgage over time with income that is inflating. This does imply holding long enough for the your rising wage to take effect, and cover transaction costs. I agree with the 7 year threshold mentioned above.

  • Report this Comment On May 06, 2014, at 3:23 PM, miteycasey wrote:

    @TMFhousel The average nationwide rent was $1,048 in 2013 and the average home cost $255,000.

    Does that $1048 include apartments?

    Do you have a link for that stat?

    Love how thought provoking your articles are.

  • Report this Comment On May 06, 2014, at 3:27 PM, miteycasey wrote:

    @TMFhousel

    An interesting side to this would be a small country like Japan where the amount of land is limited.

    All I have to say to people who think we are running out of land is you need to visit central Texas.

    The geography of the United States with two mountain ranges limiting the land near the costs makes and interesting dynamic on housing prices.

  • Report this Comment On May 06, 2014, at 3:28 PM, Calculated4Risks wrote:

    "Yet in Manhattan, I'm renting something for $5,000 that would cost me $2m to buy (and then still pay $3,000 per month in co-op fees)."

    The $2000 apartment I used to rent Washington Height section of Manhattan would cost around $300,000 to buy.

  • Report this Comment On May 06, 2014, at 3:28 PM, copperreddc wrote:

    Profoundly delusional: the bank is not lending me $259K to invest and to pay rent. If I have $260K, sure I can invest it and pay rent but who has 250K just for the taking? Not me!

    Banks lend you money for your mortgage, that's where you get this supposed 250K that you'd magically have available for investing and renting. This is the most ludicrous article I've seen. Instead of suggesting I have 250K just lying around (who is this imagined person, Warren Buffett?) how about looking at just the overall inflation adjusted gain? If as Shiller suggests its minimal, then that doesn't change the fact that I don't have 250K just lying around!

    A house is not an investment, this I agree on and yes the returns are limited beyond being able to live where you want to live for an extended amount of time.

  • Report this Comment On May 06, 2014, at 3:30 PM, TMFHousel wrote:

    <<All I have to say to people who think we are running out of land is you need to visit central Texas.>>

    Shiller's main point is that you're not just buying a chunk of land. You're buying a pile of rotting lumber, cracking bricks, rusting pipes, outdated wallpaper and chipping paint. It's a depreciating asset like anything else.

  • Report this Comment On May 06, 2014, at 3:32 PM, copperreddc wrote:

    <<Where are these housing markets where you can rent the equivalent of a $250k house for $1000/month?>>

    <The United States of America.>

    Texas? I think you mean the least desirable parts of any city. You certainly can't get it in most anywhere anyone in a major metropolis wants to live.

  • Report this Comment On May 06, 2014, at 3:33 PM, Calculated4Risks wrote:

    "The $2000 apartment I used to rent Washington Height section of Manhattan would cost around $300,000 to buy."

    I take it back. It's more like $600,000.

  • Report this Comment On May 06, 2014, at 3:38 PM, copperreddc wrote:

    <<Shiller's main point is that you're not just buying a chunk of land. You're buying a pile of rotting lumber, cracking bricks, rusting pipes, outdated wallpaper and chipping paint. It's a depreciating asset like anything else. >>

    Yet he owns his own house. Hard to cast this as anything other than "do as I say, not as I do".

    Most people will buy a house to get the security of a roof over their heads, where they want to live.

    The home buyer is privileged by taxes, which inflates the cost of property. Casting it as an investment is wrong, as is the notion that you own a house, when you have a mortgage, which means you're renting from the bank.

  • Report this Comment On May 06, 2014, at 3:38 PM, Calculated4Risks wrote:

    With two school age kids, I definitely want to leave in the $250,000 house, not in the $1000/month rental.

    In fact, I rented out my $200,000 house for $1050/month (after management fees and property taxes). So who's the sucker? I or the family rented the house?

  • Report this Comment On May 06, 2014, at 4:00 PM, NanushNanush wrote:

    Before the advent of public mass transit, towns and cities were crowded and expensive - as people had to be within a short walk from work.

    Later street car suburbs had very narrow plots, and grew in narrow strips parallel to the trolley lines, for the same reason. As with railroad suburbs.

    Universal car ownership and the interstate system, allowed sprawl and even larger houses on plots with wider and wider frontage. People leapfrogged out into cheaper rural land, destroying the value of homes in older middle and upper class neighborhoods.

    This leapfrogging out wards continues in most southern and Midwestern cities, where the geography will allow them to grow almost limitlessly.

    San Francisco is bound by water. The surrounding Bay cites and Silicon Valley are locked in by mountains and protected forests.

    LA sprawled already out to fill in all farmland and is likewise mountain, sea and state forest bound.

    NY has already reached the tip of Long Island and is bound to the north by reservoirs etc. Which only leaved central NJ to ruin with MacMansions.

    Ultimately, the value of homes increases in 2 situations.

    1. People return to value having babies. Real estate crashes if population drops. (Very fashionable, yet baby allergic Berlin is damn cheap)

    2. The location allows a particularly quick and convenient commute to a wide range of employment. (Notice the boom in value of old dinky homes, along certain subway lines in northern Brooklyn and Jersey City.

  • Report this Comment On May 06, 2014, at 4:05 PM, TMFLomax wrote:

    Wow, do you mean home prices NEVER go down? ;) Amazing that that was the conventional wisdom during the bubble period, especially since Shiller found divergent data (and of course, it just makes sense that there is nothing that "never goes down" given the pretty major reality of what a bubble is).

    I like the idea of buying a home because it's where you will live, raise your family, garden, etc. Even better if it's close to your "dream home" -- I think the insane flipping during the housing bubble was kind of sad.

    Great thought-provoking article Morgan. Lots of things aren't quite what they seem in our biz. Realistic expectations help a lot though.

    Alyce

  • Report this Comment On May 06, 2014, at 4:14 PM, KingOfPizza wrote:

    A home is a place to live, not an investment. People buying homes with the intent to profit from the resale is what got us into this mess in the first place.

    There are a lot perks to buying that don't involve dollars and cents. I can paint my house. I have a yard that I can landscape and have a garden. I don't have to share a wall with noisy neighbors, and I don't have to climb 3 flights of stairs with groceries. I can let my dog run in the back yard instead of walking her 4 times every day. I can't put a dollar figure on it, but all of those things have value to me.

    The biggest perk of all is that my mortgage payment will be the same in 2040 as it is today (and, in real dollars, cost much less). Taxes and insurance will increase, for sure, but I'd be paying for that regardless of whether I owned or rented.

  • Report this Comment On May 06, 2014, at 4:34 PM, jkaslowski wrote:

    If renting was so adventageous to most people, why wouldn't that mean that the landlord was at a disadvantage...seems odd to have a win/win situation...

  • Report this Comment On May 06, 2014, at 5:11 PM, kyleleeh wrote:

    @jkaslowski

    Most landlords I know have owned their rentals for a long time...several generations in a few cases. They can rent the place out for under 1000 a month and have it be almost all profit. They often don't have a mortgage on the rental at all.

  • Report this Comment On May 06, 2014, at 7:18 PM, workwayless wrote:

    I agree that real estate might not be a good investment. However are situations where buying allows one more funds to invest over renting. For example you buy could real estate in a down market for a low price. Therefore a good portion of your housing costs will remain stabilized at low cost .

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2937672, ~/Articles/ArticleHandler.aspx, 12/19/2014 1:41:38 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement