Is a Home a Good Investment?

July 13, 2011

An analysis of home-price and ownership data for the last 30 years in California indicates that the average single family house has never been a particularly stellar investment, says Robert Bridges, a professor of clinical finance and business economics at the University of Southern California's Marshall School of Business.

In a society increasingly concerned with providing for retirement security and housing affordability, this finding has large implications.  It means that we have put excessive emphasis on owner-occupied housing for social objectives, mistakenly relied on homebuilding for economic stimulus, and fostered misconceptions about homeownership and financial independence.  We've diverted capital from more productive investments and misallocated scarce public resources.

  • Between 1980 and 2010, the value of a median-price, single-family house in California rose by an average of 3.6 percent per year -- to $296,820 from $99,550, according to data from the California Association of Realtors, Freddie Mac and the U.S. Census.
  • Even if that house was sold at the most recent market peak in 2007, the average annual price growth was just 6.61 percent.
  • So a dollar used to purchase a median-price, single-family California home in 1980 would have grown to $5.63 in 2007, and to $2.98 in 2010.
  • The same dollar invested in the Dow Jones Industrial Index would have been worth $14.41 in 2007, and $11.49 in 2010.

In light of this lackluster investment performance, and in the aftermath of the recent housing-market collapse, why is there such rapt attention to the revival of the homebuilding industry and residential property markets?  The answer is that for policymakers whose survival depends on economic recovery, few activities have such direct, intense and immediate positive economic impact as new home construction.

Owner-occupied homes will always be the basis for healthy and stable neighborhoods.  But coming generations need to realize that while houses are possessions and part of a good life, they are not always good investments on the road to financial independence, says Bridges.

Source: Robert Bridges, "A Home Is a Lousy Investment," Wall Street Journal, July 11, 2011.

For text:

http://online.wsj.com/article/SB10001424052702304259304576375323652341888.html

 

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