Every now and then I will have a client tell me how their home has been their best investment (well, not as much recently!). We have data we can review to see how this has really been a myth in most cases. Below is a chart compiled by Yale Professor Robert Shiller on home prices:
In computing the figures here are some of the details:
Nominal return of home prices (1890-2012): 3.00%
Inflation (CPI- 1890-2012): 2.83%
Real Return of home prices: 0.17%
Because housing tends to be the largest purchase an individual will ever make, most tend to look at the dollars and not the returns. For example, let’s use a recent conversation I had with a client. This client purchased a home in 1980 for $150,000 and it is currently worth $500,000. On paper, this looks like a great investment…a $350,000 gain! When we dig into the numbers, here is what everyone misses: there are substantial carrying costs with a home that are often overlooked (real estate taxes, maintenance, repairs, closing costs, insurance, etc). Second, when you calculate the returns (even without those costs) it comes out to 3.83% per year. As a comparison, over that same period, the S&P 500 averaged 11.2% per year. Had the $150,000 been invested into the stock market it would be worth over $4.4 million.
I am not saying that homes should not be purchased, but that you should be leery of conventional wisdom that says your personal residence(s) will be good investments over time. The data just does not support that argument.
