Friday, December 26, 2014

The Truth About Home Ownership as a Financial Investment ... It's Not a Good One

Home ownership is a good thing. It's long been the "American Dream." But it's definitely not a money maker. Not even close.

Let's not mistakenly assume that home ownership's long term benefits are comparable to or better than what we can earn by consistently saving and investing our long term 'patient' money in a diversified basket of blue chip dividend paying stocks.

In fact, stock market performance over the long haul is a huge winner when compared to investing in homes or any other financial asset. Stocks have generated inflation adjusted returns of ~6% over the long term while homes have only broken even in inflation adjusted money. Earning 6% more annually will double the initial investment over 12 years and over 36 years will accumulate to ~8 times more than housing's average annual return of zero.

So by all means, but only when you can afford to do so, buy a nice house in a nice neighborhood. Just don't borrow to the hilt and believe the myth that homes are a great financial investment. Because they aren't.

Home Buyers Are Optimistic but Not Wild-Eyed in one short paragraph tells the story about the housing market as a poor financial investment:

"Ten years from now, there could be another housing boom or bust. But since 1890, the average appreciation of inflation-corrected home prices in the United States has been only a third of 1 percent a year. That’s why housing hasn’t been a great investment. And in 10 years, it may be almost equally likely that real home prices will be higher or lower than they are today."

Summing Up

Despite popular belief, over a long period of time homeownership has never been a good financial investment compared to alternatives like the stock market.

When the bubble burst in the housing market a few years ago, it caused lots of pain and anguish among countless overly leveraged home owners. And home equity loans which were taken out before the price bubble burst resulted in thousands of home foreclosures and personal bankruptcies.

Home ownership is nice, assuming the home is affordable.

But as a low risk undertaking and money maker, it isn't. That's a ruinous myth.

That's my take.

Thanks. Bob.

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