Brett Arends: More on Residential Real Estate's Real Returns

A week ago, we posted an item on the perception that residential real estate is often a great investment (when the residential real estate market is falling off a cliff, of course). We've always thought that perception was flawed, not in the sense that it's always and everywhere wrong (because in some places and times it can be fabulously right), but in the sense that it reflects a very narrow sense of the costs and benefits of acquiring and possessing residential real estate.

In that post, we drew on a Wall Street Journal column by Brett Arends. Apparently Arends got so much feedback on that initial item that he had to write more on Friday. And once again, he got it right. After discussing tax benefits, transaction costs, the illiquidity of the collateral, and other considerations, he closed with this:

The real benefits of home ownership are any capital appreciation, plus the imputed rent, minus the effective cost of the mortgage and property taxes, other costs, and the return you could earn on your down payment elsewhere.

That's a complex figure, and it varies widely. But if your home's appreciation is lower than the annual cost of borrowing, as it has been for many over the last 20 years, leverage is not much of a friend.

Well put.

Sources

Brett Arends, "Is Your Home a Good Investment?" Wall Street Journal, May 27, 2009

Brett Arends, "Why Your Mortgage Won't Make You Rich," Wall Street Journal, May 29, 2009

Comments

[conceptwizard:]

I have clients that are farther ahead by renting than buying. I believe its a quality of life choice. Some people want to own their own property, garden, mow, maintain and pay taxes. When you calculate the amortized interest, property taxes and the renovations required to keep value, your money is better off many places. But the American dream is/was home ownership. A lot of dreams are going up in smoke. What will the new American dreams be after this fiasco, a low income complex and a Government motors pedal car?

Jun 04 12:24 AM

[Fighting Yoda:]

Home is a place to live and not an investment. If you think of it as an investment do the math and the right math to figure it out. If home price less than the interest rate you lose. As Brett points out the rates have been higher (despite being very low) than home appreciation over the last 20 years (the boom and the bust).

“From 1994 through 2009, according to the Case-Shiller index, U.S. home prices produced an annualized return of 4.7% a year. The picture since 1987 has been even less appealing. Homes have only gained about 4.1% a year since then.” Against interest rates of 5% and above.

Most pople do the simple (incorrect) math bought home for 300 sold for 450 made 150. They need to count the interest they paid in between (+ maint costs etc etc)

Jun 04 02:39 AM

[nobull:]

If the jokers in Fed and Treasury werent throwing away money and running up inflation, housing would knocked out cold as an investment. But its still in the game, although valuations have to be more reasonable to make it appealing.

Jun 04 09:13 AM

[2houndz:]

I have been renting for awhile after selling my house in November 2007 (thank God). Up until recently I would have disagreed with anyone who says you are better off renting. Clearly for my generation at least, renting is better financially for most people.

It all comes down to lifestyle, and how you want to live. That being said, I do plan to buy another home eventually, but we will be looking at it as a place to live, and as opportunity costs lost to my investment portfolio, not as an investment itself. Rather than the 4,000 sqft McMansion we sold, we are hoping to buy an 1,800 sqft townhouse, and use the money we were dumping into mortgage payments, taxes and upkeep to do something we actually want to do, like travel. What a novel idea. Wish I'd thought of it ten years ago.

Now if I can figure out what to do with all the stuff we've accumulated to fill the McMansion....


On Jun 04 02:39 AM Fighting Yoda wrote:

> Home is a place to live and not an investment. If you think of it
> as an investment do the math and the right math to figure it out.
> If home price less than the interest rate you lose. As Brett points
> out the rates have been higher (despite being very low) than home
> appreciation over the last 20 years (the boom and the bust).
>
> “From 1994 through 2009, according to the Case-Shiller index, U.S.
> home prices produced an annualized return of 4.7% a year. The picture
> since 1987 has been even less appealing. Homes have only gained about
> 4.1% a year since then.” Against interest rates of 5% and above.
>
>
> Most pople do the simple (incorrect) math bought home for 300 sold
> for 450 made 150. They need to count the interest they paid in between
> (+ maint costs etc etc)

Jun 04 09:22 AM

[Mr. Ed, Jr.:]

For too many Americans, history started when they were born.

They and their parents -- and even grandparents-- knew as inarguable truth that house prices only went up, so it was not just a place to raise a family, it was how to build the nest egg. That "truth" was passed down from one generation to the next.

It was only natural , when the housing frenzy started, to believe it was either buy now or forever be left behind.

Then they were slapped in the face by the "new reality" that now seems as inarguable as the old belief -- renting is OK, maybe even financially safer. The housing crash will color the housing experience for generations to come. That is one reason (There are many) why the housing market is unlikely to have significant upside for a long time.

Jun 05 12:36 AM