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 https://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.

Comments are closed.

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