Sorry, but Your Home Is a Bad Long-Term Investment by Selena Maranjian

Don’t buy something unless it produces income  -GC

Your home is a great place to raise your family. It’s a fine place to put your interior decorating skills to work. It’s perfect if you would like shelter from the elements.

You can think of it as your showpiece, your castle, or your refuge. Just don’t go thinking of it as a great investment — because it probably isn’t.

A shocking statistic
It’s not uncommon for homeowners to think of their homes as investments. That’s not ideal, though, because real estate isn’t the best path to wealth for most of us. Nobel-prize-winning economist Robert Shiller is famous for his studies of the housing market, and his data suggests that housing prices have grown at a compound annual rate of just 0.3% during the past century (inflation-adjusted), while the S&P 500 has averaged roughly 6.5%.

Even when you do see your home appreciating in value, it doesn’t mean you’re really getting ahead — as other homes in the area are appreciating, too. Sell your home at a profit, but you’ll very likely need to spend a similar amount on your next home. The situation can be different in retirement, but even then, downsizing isn’t a no-brainer — some retirees upsize.

Should you not own a home?
So should you skip buying a home? Not necessarily. There are pros and cons to home owning, and it is a rational choice for many people.

For one thing, mortgage payments can be higher than rental payments, but mortgage interest is tax-deductible. Buying a home means no landlord will be booting you out of your home, or significantly raising your rent.

A house can give you more room than an apartment (with more storage, via a garage, attic, basement, etc.), and perhaps a yard or garden you can style as you wish. A house of your own can provide more privacy, too.

On the other hand, a mortgage renders you less financially flexible. You’ll be tied in to regular mortgage payments, and unlike with a portfolio of stocks, you can’t just liquidate part of it if you need some money. (You may be able to take out a home equity loan, but that will cost you.)

Whenever you do need to sell your home, you’ll be at the mercy of prevailing home prices, which can be more volatile over time than many people appreciate. Owning a home will mean you’ll face significant expenses maintaining it, making repairs, and perhaps remodeling it.

Better investments
So if your home isn’t the best investment, what is? Well, for long-term money, the stock market is your best choice.

Check out this data from Wharton Business School professor Jeremy Siegel, who has calculated the average returns for stocks, bonds, bills, gold, and the dollar, between 1802 and 2012:

Asset Class Annualized Nominal Return
Stocks 8.1%
Bonds 5.1%
Bills 4.2%
Gold 2.1%
U.S. Dollar 1.4%

SOURCE: STOCKS FOR THE LONG RUN.

The annualized rate for stocks from 1926 to 2012 was 9.6%, by the way. Siegel’s data shows stocks outperforming bonds in 96% of all 20-year holding periods between 1871 and 2012, and in 99% of all 30-year holding periods.

A terrific option for many, if not most, of us is to opt for a simple, low-cost broad-market index fund, such as the SPDR S&P 500 ETF, Vanguard Total Stock Market ETF, and Vanguard Total World Stock ETF. Respectively, they will distribute your assets across 80% of the U.S. market, the entire U.S. market, or just about all of the world’s stock markets.

It’s worth noting that, for those who have a lot of trouble socking money away for tomorrow, owning a home can be an effective way to save. Each mortgage payment will build equity. Your real estate investment might not grow as briskly as stock investments, but it’s still likely to grow somewhat over time, ideally at least keeping up with inflation.

No matter how good we are at saving and investing, though, many of us can have our cake and eat it, too — owning a home while also plowing money into retirement accounts and investing in stocks (perhaps along with some bonds).

Buying a home isn’t necessarily a mistake at all, but don’t think of it as a great investment. It’s more likely just a great place to live.

Originally posted by The Motley Fool

About The Author