Wednesday, May 23, 2007

Dueling Fools on Housing: Good or Bad Investment?

One Motley Fool contributor argues that buying a home is "The Best Investment Ever."

Another Motley Fool contributor argues that a house is "The Worst Investment Ever," (via Society and Money blog).

Using quarterly "House Price Index" data from the Office of Federal Housing Enterprise Oversight (OFHEO), the chart above compares the S&P 500 Index to the House Price Index for the U.S. and for the state of California from 1975-2006.

Average annual return for owning a home: 6.08%
Average annual return for owning S&P500: 9.32%


At 5/23/2007 3:25 PM, Blogger Unknown said...

Great return comparison. Two issues:

1. Tax deductibility of home mortgage interest obviously matters for US.

2. Housing is an asset where you have leverage. You are putting say 20% down. Say $100,000 for a $500,000 house. If housing values go up 3%, then you have a 15% return. So computing returns is trickier than it sounds.

I live in NY where you can purchase a Condo and rent it out pretty easily (not so for Coops). Unlike other markets, you are not forced to sell in a downturn given the ability to rent it.

So you just have to figure the percentage down to get to a point where you are reasonably cash flow neutral. Then compare the return on housing with leverage to the return on the same money in the market.

Up until recently, NYC was a very attractive investment relative to the Stock Market. Now the amount one must put down to stay cash flow neutral has grown as rent has increased more slowly than sale prices.

At 5/23/2007 9:59 PM, Anonymous Anonymous said...

The FirstResponder is right. If the return on housing 6.08%, then the ROI of the 20% down payment is 30.4%. And the mortgasge interest and real estate taxes are deductible. And after two years of ownership the first $250,000 (or 500K if married) of gain is not taxed. And everyone has to live somewhere.

At 5/24/2007 5:54 AM, Blogger Tim Worstall said...

Quite, you have to live somewhere, so the rent not paid needs to be added to the return.

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