Sunday, November 15, 2009

Home Ownership Investment Logic

An article in the WaPo dispels some common myths about home ownership. Yet, it neglected to mention something that I think is tremendously important:
1. Housing is a great long-term investment.

Historically, the value of owner-occupied homes has risen at a fairly low rate, one that pales in comparison with the performance of stocks and bonds. Between 1975 and 2008, the price for houses of comparable quality and size appreciated an average of about 1 percent per year. You would have earned well over 2 percent per year had you invested in Treasury bills over the same period. And you would have earned even more on riskier investments: Moody's corporate bond index rose an average of 6 percent per year between 1975 and 2008, while the S&P 500 stock index rose an average of 8 percent per year. Most of the return from owning your home comes not in financial gains but in the benefits you enjoy by living there.

Because homes are the one investment that most people take huge amounts of leverage in, they appear to be great investments because of the total amount of money that can be made. It's also why many financial crises start in the real estate sector. I always find it odd that commentators never say, "Look, you are borrowing hundreds of thousands of dollars to buy something. Something that can increase value or, as we've seen recently fall, as well. Even though houses seem like safe investments because they are more tangible than something more ersatz like stocks doesn't mean they are actually safe."

I think that perception -- the tangibility of houses -- led people who got burned in the dot com bubble to pursue the housing bubble. But it's important to remember that assets are still assets and all can go up and down in value. Even something as staid as a fixed rate government bond is subject to price fluctuations.

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