date-58b8ef8425d7a7.74363386.pdf | Stock Market Index | S&P 500 Index

Please download to get full document.

View again

of 2
All materials on our website are shared by users. If you have any questions about copyright issues, please report us to resolve them. We are always happy to assist you.
Information Report
Category:

Documents

Published:

Views: 19 | Pages: 2

Extension: PDF | Download: 0

Share
Related documents
Description
History says home real estate is a bad investment While the housing bust showed many people the dangers of investing in residential real estate, investors could have realized this long before, simply by paying attention to history. Prior to the bust, recent history made many investors feel comfortable that buying up houses would prove profitable. The recent Journal of Wealth Management paper Measuring Residential Real Estate Risk and Return noted that while there were a few individual quarte
Transcript
  History says home real estate is a bad investment While the housing bust showed many people the dangers of investing in residential real estate,investors could have realized this long before, simply by paying attention to history.Prior to the bust, recent history made many investors feel comfortable that buying up houses wouldprove profitable. The recent Journal of Wealth Management paper Measuring Residential RealEstate Risk and Return noted that while there were a few individual quarters when the S&P Case-Shiller home price index fell, the overall trend for the 19-year period 1987-2005 was upward. Therun-up in home prices was so great that for the 10-year period 1997-2006, the nominal and realreturns were 9.7 percent and 7.1 percent, respectively. And from 2000 through 2006, the figureswere 11 percent 8.2 percent, respectively.However, making decisions based on such evidence means falling prey to the mistake of recencybias, which is the tendency to give too much weight to recent experience while ignoring long-termevidence. (For more on recency bias, see my new book, Investment Mistakes Even Smart InvestorsMake.)Knowledge of the historical evidence would have led to the conclusion that prices don't go straightup. In fact, in just the period 1972-1984, the U.S. had experienced three boom-bust cycles in housingprices: 1972, 1978 and 1984.Looking at the longer-term data, we also see quite a different picture. For the period 1890-2005,inflation-adjusted home prices rose just 103 percent, or less than 1 percent a year. One can onlyimagine how many fewer investors would have piled into the residential home market if they wereaware of the historical evidence. As Spanish philosopher George Santayana famously remarked: Those who cannot remember the past are condemned to repeat it.  Yale professor Robert Shiller, in his book Irrational Exuberance, argued that home buyers may alsobe influenced by comparing simple returns on infrequent real estate transactions. Assume that ahome in 2005 sold for 10 times the price it sold for in 1945. While that produces a simple return of 900 percent, the real (inflation-adjusted) annualized return was less than 1 percent. Another likely error made by homebuyers was that the simple rate of return ignores all of the costsof residential real estate -- including significant transactions costs, closing costs, property taxes,maintenance, and improvement costs. An assumption of 1 percent for maintenance costs would yielda real return of below zero.The return on investment for a homeowner should also consider the imputed rental income (meaningthe money you save by owning instead of renting), net of all costs. A study covering the period 1952-2005 found that when costs and imputed rental income were included, the?real return tohomeowners was 6.9 percent, comparable to the 7.3 percent real return for the S&P 500.Unfortunately, that analysis ends right about the time the bubble burst. At the end of 2005, theCase-Shiller Composite 20 home price index was 202.16. By October 2011, it had fallen all the wayto 138.56, a drop of more than 31 percent. And since the consumer price index rose more than 15percent over that period, the real loss on home prices was more than 46 percent. While the homeprice index was falling 31 percent, the S&P 500 provided a total return of over 13 percent over thesame period. And http://lara8hansen60.shutterfly.com/lara8hansen60 the S&P 500 has since risen to  1,308 from 1,253 (as of Jan. 18), an increase of more than 4 percent (not including the return fromdividends). You should never make any investment without understanding the nature of the risks involved. Andit's important to avoid the mistake of recency bias, which leads to buying yesterday's winners(typically at high prices) and selling yesterday's losers (typically at low prices). To avoid that error, you have to know the historical evidence.There's another important point to make about residential real estate, especially your own home: A home does provide benefits beyond any consideration as an investment. And for many people, payingdown the mortgage provides them with forced savings. However, although a home is clearly anasset that belongs on your balance sheet, along with any mortgage, it should be viewed as aconsumption item, rather than an investment. There are things you can do with investments -- likerebalance and tax-manage (or harvest ) losses -- that you simply can't do with a home.? 2012 CBS Interactive Inc.. All Rights Reserved.http://www.cbsnews.com/news/history-says-home-real-estate-is-a-bad-investment/
We Need Your Support
Thank you for visiting our website and your interest in our free products and services. We are nonprofit website to share and download documents. To the running of this website, we need your help to support us.

Thanks to everyone for your continued support.

No, Thanks