A home is a lousy investment

So says this USC professor, and he’s got the numbers to at least support his point. Of course, if you consider a house to be a depreciating liability, which I do, then you don’t really have an investment at all. You do, however, have a place to raise your family and the land the house sits on will, with luck appreciate.

5 Comments

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5 responses to “A home is a lousy investment

  1. HG

    The DJIA rose 8.6% annually over the 30 years through 2010. He claims home prices in California rose 3.6% annually over the same period. I would point out that the 3.6% annual return levered 4-to-1 (constant) gets the homebuyer to a levered return of 8.1% if you concede that interest costs approximate the cost of rent avoided. There are all kinds of objections one can raise to my number but it is closer to correct than he author’s comparison. The author’s happy renter is being subjected to ruinous inflation in his rent costs over the 30 years in question, by the way.

    This ivory tower hooligan is ignoring what every regular guy would know–that for the “median” homebuyer that purchase in 1980 was a fantastic investment. It was stable in its intrinsic value, not subject to significant risk that it would become obsolete (other than your very gradual depreciation / decay) and most importantly the “median” homebuyer whose net worth was likely not much more than his downpayment could lever it 4-to-1 and protect himself against the government’s 2% inflation.

  2. For what the State of California charges you to live in their state a home may be a lousy investment there. This is just one more back seat driver who will someday look stupid when things turn around. And they will turn around.

  3. edgewater

    i think that this study … and others like it … fail to assign ANY value to the implicit dividend the homeowner receives by occupying the home. if a million dollar house would otherwise rent for, say, $4000 a month, then there’s a return of nearly 5% just for the occupancy value. that might well change the conclusion.

  4. HG

    Edgewater, I think the study purports to assign a value to the elimination of rent, but basically does so in backwards fashion. As near as I can tell, the professor’s calculations implicitly assume that the stock-loving renter will pay rent equal to the house-loving buyer’s mortgage payment over the entire 30 year time period. He even has the nerve to charge the house-loving buyer for “costs above the normal cost of rent” (again, backwards, by allowing the stock-loving renter to add to his stock investors with the money he “saved” by renting and not having to do maintenance on the house). It seems extremely unlikely to me that the stock-loving renter has been able to talk his landlord into keeping his rent unchanged since 1980.

  5. Anonymous

    Nor does the professor factor in the cost of your divorce after making your wife move into 15 different rentals over those 30 years.