Why Buying a House is a Bad Investment

Why Buying a House is a Bad Investment

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An analysis of home-price data for the past 30 years in California indicates that the average single-family house is not a good investment, economics professor Robert Bridges writes in The Wall Street Journal.

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He offers this analysis, using the value of a median-price single-family house in California: From 1980 to 2010, the value of the house rose an average of 3.6% per year, so a dollar used to pay the house in 1980 would have grown to $5.63 by 2007 or to $2.98 by 2010, after the bust. If you had invested  the same dollar in the Dow Jones Industrial Average, you would have had $14.41 in 2007 and $11.49 in 2010.

Or, he says, if you had invested your $19,910 down payment plus homeownership costs that exceeded the cost of renting in stocks, you would have had a portfolio worth $1.8 million in 2010, compared with a house worth $296,820. The Wall Street Journal has a chart comparing the Dow Jones index and the median price of a California home over the years.

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“Owner-occupied homes will always be the basis for healthy and stable neighborhoods,” writes Bridges, a professor of clinical finance and business economics at the University of Southern California’s Marshall School of Business. “But coming generations need to realize that while houses are possessions and part of a good life, they are not always good investments on the road to financial independence.”

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The glorification of homeownership also has implications for the larger economy. Bridges writes:
In a society increasingly concerned with providing for retirement security and housing affordability, this finding has large implications. It means that we have put excessive emphasis on owner-occupied housing for social objectives, mistakenly relied on homebuilding for economic stimulus, and fostered misconceptions about homeownership and financial independence. We’ve diverted capital from more productive investments and misallocated scarce public resources.
Not surprisingly, Bridges’ article drew a lot of comments, more than 200 in less than a day, and commenters were predictably split on whether they agreed with his analysis.

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Many commenters noted that timing, leverage and psychological factors can tip the scales toward ownership. Randall Dodd wrote:
The author obviously thinks like a statistician rather than a psychologist, and from a statistical standpoint, he makes a reasonably compelling case. The point of his comments might also be summarized as, “Timing is everything.”

Regardless, unfortunately, most Americans don’t have the discipline to make monthly contributions to a retirement account because the consequences of not following the routine are so far in the future. Whereas, the consequences of not paying one’s mortgage — historically anyway — have been immediate, and severe.

So when one factors human behavior and shortcomings into the equation, it’s difficult to argue with the “forced savings account” homeownership represents, even if a like amount of money invested in the stock market will most likely yield a bigger return.
What’s your view? Is buying a home a good investment? Even if you could theoretically make more money in the stock market, is buying a home a better choice?

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