Homeownership has long been associated with investment savvy.
Tax breaks, equity growth and the sanctity of the American dream — the real estate community has made a pretty compelling case over the years for the merits of purchasing property versus throwing your money away on rent.
But as the housing market redefines itself in the wake of the subprime mortgage crisis and the ensuing industry recession, a number of economists who follow the industry suggest the benefit of buying no longer applies. Others say it never did.
Yale economist Robert J. Shiller, whose book “Irrational Exuberance” accurately predicted the stock market collapse in 2000, notes that U.S. housing prices posted roughly a zero percent gain between 1890 and 1990, after adjusting for inflation.
“That’s the remarkable thing that most people don’t realize,” he says. “This is not a financial investment. It’s an investment that provides you services and you have to answer for yourself how you value that.”
The biggest dividend of real estate, says Shiller, is the lifestyle it affords. Some are willing to pay a premium for kid-friendly neighborhoods, quiet streets, a historic home or a condo close to work.
But taking the plunge today is a bigger financial gamble than it once was.
“If you’re doing it more with investment motives, then I think you have to be careful,” says Shiller, who co-founded the Standard & Poor’s Case-Shiller Index for housing prices. “I wouldn’t be overly influenced by the idea that home prices are low, and they might suddenly take off — that’s what’s coloring some people’s thinking now. It might be more accurate to wait another five years.”
Or not at all.
Research by Jack C. Francis, a former Federal Reserve economist and professor at Baruch College at the City University of New York, reveals that residential real estate has consistently failed to measure up with other asset classes over the last 30 years.
From 1978 to 2008, he found, the S&P 500 returned an average of 11 percent a year, while U.S. small-cap stocks produced an average return of roughly 13 percent. Single-family homes posted less than a 6 percent gain.
“For generations, parents and grandparents have been telling us that the way to get ahead was to buy a house and keep making payments with a fixed interest rate and after 20 or 30 years it would be way up in value and that was your nest egg in old age,” says Francis. “You could either live in it rent free or sell it and use the proceeds to rent an apartment.”
That was good advice until 2006 when home prices collapsed, he says, and it “may become good advice 10 years from now, but right now it’s not.”