Home Ownership Is Not the Investment You Think It Is
People will often hear stories about real estate prices of yesteryear versus today and think that homes are one of the best investments a person can make. As a result, I’ll often hear people say things like, “Why would I put money into the stock market when I could put money into my house (or heaven help them, a second house)?”
To these people, I try to explain that residential real estate held for personal use is not the wealth builder they may think it is.
For example, a recent article from the WSJ features a Long Island home that was once bought by Groucho Marx in 1926 for $27,000 (a price equal to $466,000 in July 2023 dollars), which is now selling for $2.3MM. An astonishing amount of growth until you realize that over the time period of 97 years, that gain represents an annual return of 4.73%. This growth rate is in line with the Case Shiller Home Price Index which goes back to January of 1987 and reflects annualized home price appreciation 4.48%.
This return figure doesn’t account for the money that went in to paying taxes, maintenance, insurance costs, or renovations but even if we ignore those expenses, had that same money been invested in a portfolio replicating the S&P 500 in January of 1926 (3 years before the start of the Great Depression), with dividends reinvested and ignoring taxes, those same dollars would have been worth roughly $331 million today (an annualized return of 10.17%.)
But I Need to Live Somewhere?
If owning a home and spending money on your home makes you happy, and the costs are properly accounted for in your financial plan, you should absolutely spend the cash. Money is nothing if not a tool to help us enjoy the things we love. However, if you are trying to justify a home purchase in strictly investment terms, history tells us that a single-family home is unlikely to be a better store of real value than an investment in five hundred of the largest, most profitable, most soundly financed and most innovative companies in the United States and the world.
When it comes to writing about investments, the disclaimers are important. Past performance is not indicative of future returns, my opinions are not necessarily those of TSA Wealth Management and this is not intended to be personalized legal, accounting, or tax advice etc.
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