Housing Beats Stocks As An Investment
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Estelle Smith
R.I. REALTOR® President |
Housing continues to be a solid investment, largely unaffected by the volatile movements of the stock market, according
to the Rhode Island Association of REALTORS.
The sharp changes in the financial markets over the last year underscore the stability of residential real estate
as a safe choice for consumers. "Homeownership should be approached as a long-term investment, providing both
equity accumulation and tax benefits over time," Estelle Smith, CRS, GRI, President of the Rhode Island Association
of REALTORS® and broker/co- owner of Benchmark Associates, Inc. Middletown, R.I.said.
The National Association of REALTORS® reports the median existing-home price increased a little over 4 percent
last year, while Freddie Mac said home values increased 7 percent in 2000. In the same time frame, stock indexes
finished in negative territory.
However, she pointed out that the true return on a home investment should not be based simply on home appreciation,
but also the amount leveraged. Homebuyers typically use their own money to cover only 5 to 20 percent of the purchase
price of a home, yet the home appreciation they realize is based on the total value.
In addition, home buyers receive tax benefits for their investments, in the form of deductions allowed for mortgage
interest and property taxes. "This leveraging of borrowed funds gives housing a return far in excess of the
market's appreciation," Smith said.
The 1998 "State of the Nation's Housing" report from Harvard University's Joint Center for Housing Studies
shows a dramatic increase in the rate of return on housing the longer it is held. For instance, the housing survey
shows that the typical homeowner who experiences an annual home appreciation rate of 5 percent and who made a down
payment of 10 percent will generally receive a 94 percent return after owning the home only three years.
After owning five years, the rate of return increases to 225 percent; after 10 years, the rate of return jumps
to 623 percent. For those making a 20 percent down payment and experiencing the same amount of home appreciation,
the rate of return is lower, but still very respectable: after owning three years, the average rate of return is
46 percent; after the five years, 110 percent; and after 10 years, 305 percent.
In comparing changes in stock prices to changes in housing prices, Smith noted that while the stock market has
experienced wide swings in value over the past 20 years, home values overall have continued to rise steadily. Between
1976 and 1997, before the more recent period of wild stock market variations, the Standard & Poor's 500 Composite
Stock Price Index (S&P 500), a widely accepted measure of the performance of the U.S. stock market, recorded
an annual average growth rate of 11.7 percent. At the same time, the resale value of homes rose at an annual average
rate of 5.7 percent. However, during four of those years, the S&P 500 posted a decrease in overall stock prices;
while housing prices in general increased consistently. In fact, during that time period, the variance in stock
returns was more than 13 times that of the variance in home appreciation at the national level.
"Housing is not a quick-in, quick-out investment. However, when purchased for the long term, housing is one
of the safest investments a consumer can make," Smith said. "In addition to the savings accumulated through
a buildup of equity and the tax advantages, a home provides shelter. Absolutely no other investment provides this
benefit," she added.
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