Do you pitch your listings as a "good investment"?

  • Yes (56%, 49 Votes)
  • No (45%, 39 Votes)

Total Voters: 87

Yale economist and real estate pricing guru, Robert Shiller, has published article after book after research report arguing that homeownership is not necessarily a lucrative investment.

In fact, Shiller has repeatedly argued that investing in the stock market over the long-term will produce much greater returns than real estate.

Given the great amount of attention Shiller receives as the co-creator and namesake of the nation’s most trusted home price index, the Case-Shiller index, researchers at the Federal Reserve Bank of Atlanta (FRBA) decided to put his hypotheses to the test.

The average end-user of a new home owns their home for 13.3 years, according to the National Association of Home Builders. Researchers therefore used this period as a benchmark for the investment term. They found homes held for longer than 13 years showed a much greater likelihood of producing positive returns.

On the other hand, 40 percent of homes held for less than 13 years showed negative annual returns on average. Of the homes owned for 13 years or more, only 12 percent showed a negative average annual return.

With that said, all homes indexed by Case-Shiller from 1926 to 2012 showed average annual returns between 0.2% and 1.2% once adjusted for inflation.

In order to test Shiller’s claims that investing in stocks is more lucrative than real estate, researchers at the FRBA compared Shiller’s real home price index to the S&P 500. They found that average annual returns realized by investing in stocks, while showing greater volatility, were considerably higher than real estate. Investing in an S&P 500 indexed fund produces an average annual return of 4.55%, compared to a 0.97% average annual return for a real estate investment.

It is crucial to note that these figures reflect averages based on a large pool of investments, both in real estate and stocks. Thus, individual, anecdotal experience will always vary. However, over the long-term, the vast majority of individuals will realize returns similar to those reported here.

first tuesday insight

This final point is absolutely key. A great deal of real estate sophistry is based on anecdotal “evidence” of what a foolproof investment real estate is.

Sure, your grandma may have bought her house in 1952 for $3,000 and sold it in 2002 for a million bucks, but inflation adds up over 50 years, not to mention the sunk costs of maintaining the property for that period of time.

The other popular anecdote mistakes short-term volatilities for long-term returns — I bought a year ago and my house has already appreciated 20 percent! Our response? You can thank the speculators buying up property like so many board game pieces for your recent windfall. Oh yes, and those that buy today can thank them for their negative equity next year when today’s mini-bubble pops!

People can swap stories all day about their phenomenal real estate returns, but making money by swapping real estate is best left to the gamblers with plenty of cash and a healthy appetite for risk — this is called speculation by the way. Average end-users looking to actually use their home for shelter simply will not realize a windfall, unless they serendipitously buy in a trough and decide to sell during a bubble. Very few ever do.

What’s this mean for professionals working in the real estate industry? First of all, equipped with the knowledge that long-term real estate ownership does not produce real returns on average, with the last ten years definitively proving so, ask yourself whether or not it is ethical to pitch your listing as a “great investment.”

Of course, this all addresses the dying illusions we hold as a society about our real estate (and other material investments, such as gold). Our society is becoming more financially literate all the time. The decision to invest available capital in a down payment versus some other asset (such as stocks) will, within a generation, become second nature for prospective buyers.

This is just one aspect of the real estate paradigm shift that was triggered by the imploding market bubble and the coming upward long-term trend in mortgage rates. Are you keeping up?

Related articles:

Homeownership: not the fail-safe investment it was between 1980 and 2005

Self-fulfilling prophecies: the real estate bubble both ways

Re: “Is investing in housing really a losing a proposition?” from the Federal Reserve Board of Atlanta