Are Houses a Good Investment? Part 2.

Are Houses a Good Investment? Part 2.

May 06, 2014

recent article in the Washington Post discussed housing as an investment and whether to buy or rent. It was an excellent analysis of a complex situation.

The basic answer is no, houses have not been a great investment.

Over the last century, homes prices exceed inflation by an average of .3% per year while the S&P 500 Index exceeded inflation by 6.5% per year. Adding the costs of maintenance and upgrades might result in a negative rate of return after inflation.

Of course, that ignores many factors, including tax breaks, rental costs if you don’t own, the psychic satisfaction of owning, etc.

It's easier to understand if we treat this as two issues:

  • Should a family buy or rent the home they're going to live in?
  • Is housing a good investment, for instance, for someone who wants either to buy a second home to rent or to buy and sell homes to make a profit?

In terms of owning your own residence, it probably makes sense for many Americans when there's a positive rate of inflation, low mortgage interest rates, well built homes, current tax breaks, long-term ownership, etc.

However, because homes have increased in value only slightly more than the rate of inflation, it's a tough way to invest. To profit from buying and then either renting or selling homes, investors have to be very good at strategy, tactics, and management. Investors need to buy and sell at the right time, upgrade in ways that maximize the attractiveness of the house at a reasonable price and find good tenants. Location makes a big difference: are you trying to do this in Washington, DC or Detroit?

The article quotes economist Robert Shiller on other problems: “People forget that housing deteriorates over time. It goes out of style. There are new innovations that people want, different layouts of rooms,”... “And technological progress keeps bringing the cost of construction down.”

The stock market, historically, was an easier way to profit. Investors did not have to buy and sell at the right time. Long-term returns were so much greater than inflation that investors in a well-diversified, well-managed portfolio could buy and hold and still see their portfolios increase over long periods of time.

Past performance is no guarantee of future performance but I prefer stocks.


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