It may sound like heresy to some in the industry, but Catherine Rampell has a point in the Washington Post today – a home is not a good investment.
Calm down. That comes with a caveat – it’s not a good investment as an investment.
Catherine even quotes the highly regarded economist Robert Shiller:
The fact that Americans still financially fetishize homeownership baffles me. Never mind that so many people lost their shirts (among other possessions) in the recent housing bust. Over an even longer horizon, owning a home has not proved to be a terribly lucrative investment either. Don’t take my word for it; ask Robert Shiller , winner of the 2013 Nobel Prize in economics who previously became a household name for identifying the housing bubble.
“People forget that housing deteriorates over time. It goes out of style. There are new innovations that people want, different layouts of rooms,” he told me. “And technological progress keeps bringing the cost of construction down.” Meaning your worn, old-fashioned home is competing with new, relatively inexpensive ones.
Over the past century, housing prices have grown at a compound annual rate of just 0.3 percent once one adjusts for inflation, according to my calculations using Shiller’s historical housing data. Over the same period, the Standard & Poor’s 500-stock index has had comparable annual returns of about 6.5%.
Yet Americans still think it’s financially savvy to dump all their savings into a single, large, highly illiquid asset.
So yes, a home is a lousy investment in terms of returns next to other types of investments.
Rampell fails to mention, though, that if someone isn’t paying a mortgage, that same amount of money – or even more since renting is now more expensive than buying – is thrown away on rent regardless, unless you plan to live in a van down by the river.
But Rampell does have a point – the constant drumbeat of the voices that housing prices should, in perpetuity – continue to rise and at a rate faster than inflation is irrational on the face of it.
Homeownership makes sense because it makes sense, with a few markets being the exception. It’s value is self-evident not as an investment vehicle, but because 1) you won’t live long without shelter and 2) because unless you expect to be extremely transient, you build equity.
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