Is Your House a Good Investment?

Is your house a good investment?

Economist Robert Shiller, an expert on housing prices, addressed this topic in the April 13 New York Times.

Shiller’s research indicates that housing prices, over the long term, typically rise .2% (two-tenths of one percent) more than inflation. That means that higher prices do not reflect a true increase in value. When corrected for inflation, housing prices barely moved. Also, increases in housing prices are overstated because the costs of maintaining and improving houses are not usually counted when calculating returns.

“Here is a harsh truth about homeownership,” Shiller wrote. “Over the long haul, it’s hard for homes to compete with the stock market in real appreciation. That’s because companies whose shares are traded on a stock exchange retain a good share of their earnings to plow back into the business. The business should grow and its real stock price should also.”

I agree with Shiller that it is hard for houses to compete with the stock market in appreciation. Historically, houses haven’t done as well. It is also hard for houses to compete in terms of liquidity, ease of management and costs of maintaining the investment.

Annualized Returns, 1992-2011

Leverage, not rate of return, can make a house a good long-term investment. With a 20% down payment and 80% mortgage, a 5% increase in value becomes a 25% rate of return on the down payment. Homeowners also benefit by locking-in a major part of housing costs and by claiming tax deductions for mortgage interest.

Leverage has disadvantages:

• Returns decrease as home equity increases.
• Leverage increases risk.

So is your house a good investment? Good, yes. But not great. Most Americans who are middle-class and above probably benefit from owning an affordable house over a long period of time. But stocks – over most long periods– outperformed.

Of course, past performance -- the basis of Shiller’s research -- is no guarantee of future performance.