WSJ: Is Your Home a Good Investment?

by Mark Wellborn


The Wall Street Journal’s Brett Arends had an interesting column recently about the long-term investment of real estate.

In short, he doesn’t think that it is the best investment that you can make. He argues that the annual rate of return is far smaller than people think once you take inflation into account. He analyzes the Case-Shiller home index for ten major cities and notes that the yearly return is normally in the low single digit percentages.

From his column:

“Conventional wisdom long held that home ownership was a route to wealth, and the imputed rent — in other words, the right to live in your home — was just part of the value you got from it. Under that widespread view, the recent housing bust was simply a temporary, though deep, pothole.

Yet for very many people, even over the past 15 or 20 years, the imputed rent may have been all, or nearly all, the real value they actually got from their home.”

Arends’ theory is certainly going against the grain, but he does back up his hypothesis with data. Do you agree with him?

This article originally published at http://dc.urbanturf.com/articles/blog/wsj_is_your_home_a_good_investment/966


  1. Tim said at 2:03 pm on Friday May 29, 2009:

    It seems Arends ignores the most basic fact about housing: In America, everyone has to pay SOMETHING to live somewhere. to Illustrate with the simplest example: Would you rather rent somewhere at market rate for the next 30 years, or buy at market rate (assuming it is a reasonable price)as a place to live for the next 30 years? Regardless of the appreciation/depreciation of a home, the idea is that one day you will own it. It is THEN that it becomes an asset, and accordingly, a wise investment.

  1. jan johnson said at 4:31 pm on Sunday May 31, 2009:

    There is no academic research examining real home prices over a long period of time that supports the contention that housing on average is a good investment! Remarkable that the opposite has persisted as conventional wisdom for so long. Shiller himself has written an excellent paper demonstrating real return since 1890 on a large dataset of homes.

    Here’s the link to Shiller’s spreadsheet:

    There are at least five other studies that I’m aware of that all point to 0-1% inflation adjusted growth for real estate over the long term over a large area.

    Please note that the numbers are nominal, so you have to adjust for inflation. There isn’t good evidence to the contrary, so, for now, the case is closed, in my opinion.

    For Tim, buddy, how many people you know pay less in total ownership cost than the equivalent rent? Yeah, me neither. Put a return on the difference (which we’ll call opportunity cost) and you’ll see that residential real estate underperforms stocks, bonds, and some commodity classes (like timber), over most longer time periods. That’s the definition of a poor investment.

    Here’s a great article from 2006 describing similar trends in the US and two other countries:

    Once you read the whole thing, you’ll pretty much never believe that house appreciation stuff again.

  1. Richard said at 9:27 pm on Sunday May 31, 2009:

    The author ignores the effect of leverage on a homeowner’s return on equity. Most homeowner have a mortgage.  So, if I buy a $100k home and it appreciates at the 4% nominal rate cited in the article, I can sell it for $104k after a year.  With 100% cash purchase, that is a return on equity of 4% cited in the article.  But if I put 20% down and finance the rest through a mortgage, the return on my $20k down payment will be 20% (4k / 20k) not 4%. This is the miracle of leverage (and part of the reason we are in our current economic mess - banks overleveraged to boost their earnings) Of course, actual returns are much lower than 20% due to the transaction costs of buying/selling real estate, financing costs, and other costs.

  1. Jan Johnson said at 10:21 am on Monday June 1, 2009:

    Richard, you ignore that while leverage produces upside gains, it also produces the same effects to the downside. There are many 20 periods were there is an actual loss, and with leverage, that loss is larger. That said, my loan is a 0% down, so I hear you.

    Also, I’m sure you’ll admit that leverage is available for all investments, and cheaply. Even more, options are also available on other investments including bonds, equities, and commodities. This provides limited downside, but unlimited upside, unlike any mechanism I’m aware of for “investing” in a home.

  1. Richard said at 10:49 am on Tuesday June 2, 2009:

    My point was that the author is comparing apples to oranges.  You can’t compare the path of equity prices with the path of home prices.  One is a return on equity, while the other is a return on assets.   

    While leverage is key to most wholesale capital market investment, how many consumers borrow money to invest in their brokerage accounts or mutual funds? Not many.  Household investments in the capital market are typically not-leveraged. 

    And yes, options are available in the housing market.  The CME has a variety of options based on the Case-Shiller Index.  But like most equity options, these are generally illiquid instruments not avialble to the retail investor.

Join the discussion

UrbanTurf now requires registration in order to post comments. Register here, or login below if you are already registered.

Click here if you forgot your password.

DC Real Estate Guides

Short guides to navigating the DC-area real estate market

We've collected all our helpful guides for buying, selling and renting in and around Washington, DC in one place. Visit guides.urbanturf.com or start browsing below!

Northern Virginia

Profiles of 14 neighborhoods across Northern Virginia

Looking to Give People A Reason to Stay Past 6pm
Happily Straddling the Line Between City and Suburb
Columbia Pike
Arlington’s Neglected Stepchild is Getting a Makeover
Crystal City
Turning Lemons into Lemonade
Lyon Village
Developing An Air of Exclusivity?
Hitting Its Growth Spurt
An Urban Village Hitting Its Stride
Del Ray
Virginia’s Small Town Near the Big City
Eisenhower Avenue
The Vibrancy Might Take a Few Years
The Quiet Neighborhood By the Beltway
Old Town
Mayberry By The Potomac
132 Commerical-Free Acres
Downtown Falls Church
Staying the Same in the Midst of Change
Tysons Corner
Radical Change Could Be On The Way

See more Northern Virginia »


Profiles of 14 neighborhoods in suburban Maryland

Small-Town Living in the State Capital
Bedroom Community Gets Buzzing Cache
Cabin John
In With The New While Maintaining the Old
Chevy Chase
Affluence, Green Lawns and Pricey Homes
Downtown Silver Spring
Experiencing a Resurgence After a Bumpy History
A Suburb on Steroids
Rockville Town Square
Despite the Dynamism, Still Somewhat Generic
Takoma Park
More Than a Little Bit Quirky
A Foodie Magnet on the Verge of Change
Capitol Heights
Kudzu, Front Porches and Crime
Glass Half Full or Half Empty?
Mount Rainier
Artists, Affordable Homes and A Silo Full of Corn
National Harbor
A Development Rises Next to the Potomac
Riverdale Park
A Town Looking For Its Identity

See more Maryland »

Northwest DC

30+ neighborhood profiles for the city's biggest quadrant

16th Street Heights
DC's Sleeper Neighborhood
Where (Almost) Everyone Knows Your Name
AU Park
One of DC’s Last Frontiers Before the Suburbs
DC’s Northern Neighborhood on the Cusp
DC’s 535 House Neighborhood
Cathedral Heights
Do You Know Where That Is?
Chevy Chase DC
Not to Be Confused With the Other Chevy Chase
Cleveland Park
Coming Back After A Rough Year
Columbia Heights
DC’s Most Diverse Neighborhood, But For How Long?
An Island of Serenity East of the Park
Dupont Circle
The Best of DC (For a Price)
Foggy Bottom & West End
Where the Institutional Meets the International
Forest Hills
Ambassadors and Adventurous Architecture
Fort Totten
Five Years Could Make a Big Difference
Foxhall Village
350 Homes Just West of Georgetown
Friendship Heights
A Shopping Mecca With a Few Places to Live
History, Hoyas and H&M
Glover Park
One of DC’s Preppier and More Family-Friendly Neighborhoods
A Posh View From Embassy Row
LeDroit Park
A Quiet Enclave in the Middle of the City
Logan Circle
Trendy Now, But Not By Accident
Mount Pleasant
Sought-After Homes Surround Main Street in Transition
Mount Vernon Triangle
From Seedy to Sought-After
The Long, Skinny Neighborhood at the City’s Northwest Edge
Park View
It’s Not Petworth
Penn Quarter/Chinatown
DC’s Go-Go-Go Neighborhood
Getting a Vibrancy of Its Own
The Duke’s Former Stomping Ground
Shepherd Park
DC’s Garden of Diversity
Spring Valley
A Suburb With a DC Zip Code
Not To Be Confused With Takoma Park
Not Quite Like Its Neighbors
U Street Corridor
The Difference a Decade Makes
Woodley Park
Deceptively Residential
Adams Morgan
No Longer DC’s Hippest Neighborhood, But Still Loved by Residents

See more Northwest DC »

Southwest DC

The little quadrant that could

Southwest Waterfront
A Neighborhood Where A Change Is Gonna Come

See more Southwest DC »

Northeast DC

Profiles of 10 neighborhoods in NE

New Development Could Shake Up Pastoral Peace
A Little Bit of Country Just Inside the District’s Borders
Not to Be Confused With Bloomingdale
H Street
A Place To Party, and To Settle Down
The Northeast Neighborhood That Few Know About
Michigan Park
A Newsletter-On-Your-Doorstep Community
Evolving from a Brand to a Neighborhood
Ripe for Investment Right About Now
The Difference 5 Years Makes
Big Houses, A Dusty Commercial Strip and Potential

See more Northeast DC »

Southeast DC

6 neighborhoods from Capitol Hill to East of the River

Capitol Riverfront
Still Growing
Hill East
Capitol Hill’s Lesser Known Neighbor
Congress Heights
Gradually Rising
Notable for Its Neighborliness
Historic Anacostia
Future Promise Breeds Cautious Optimism
Eastern Market
A More European Way of Living

See more Southeast DC »

Upcoming Seminars ▾