Home values are down about 30 percent on average since the housing bubble started to burst nearly five years ago. So it stands to reason that hard fall would have disabused Americans on housing as a great investment.
So much for reason.
Two recent reports show that we're still convinced that owning a home is a better investment opportunity than funding our 401(k)s or IRAs.
In a recent survey the Pew Research Center found that 81 percent of Americans believe that owning a home is the best investment a person can make. And that's not just among current homeowners who have a vested interest in thinking they made a smart investment. Just 24 percent of renters said they rent by choice, not necessity, which implies the rest would prefer to own if they could.
A new report from Fannie Mae released last week echoes the Pew survey. Eighty seven percent of Americans say homeownership is superior to renting, and even among the renters in the Fannie survey, three of four gave the nod to home ownership.
Still Betting on the House
That we still value home ownership so much isn't necessarily surprising. It provides more stability than renting, and typically gives families access to the most desirable neighborhoods with the best public schools. But what jumped out at me is that many Americans still seem to be stuck on the notion that home ownership is a superior financial investment.
When Fannie Mae asked more than 3,000 Americans to rate investments that have "a lot of potential," owning a home took the top spot. Buying a home was cited by 57 percent of survey respondents, edging out stocks at 54 percent and "putting money in an IRA or 401(k) plan" at 51 percent. Straight-up investing in a mutual fund outside of a tax-deferred account was a distant fourth, with just 35 percent of respondents feeling that's an investment with a lot of upside.
A Brief History of Housing vs. Stocks
If you're betting that a home is a better investment than stocks over the long-term, you're facing some very long odds. As Yale economist Robert Shiller has documented, over many decades home values have on average barely managed to keep pace with inflation. Shiller's data reaches all the way back to the 1890s, but just to keep things a bit more relevant, consider that since 1950, home prices have on average outpaced inflation by an annualized 0.26 percent. During that same stretch, stocks have bested inflation by about 6 full percentage points.
Even over the past 20 years, during which both stocks and housing have staged epic booms and busts, stocks still come out ahead. Way ahead. Take a look at this chart courtesy of the Pew Research Center:
Source: Pew Research Center
If you care to pay attention to long-term history, it's screaming that stocks, not your home, has been the far better inflation-adjusted investment.
So why are we so stuck on the idea that housing is a better investment than stocks?
Part of the reason may be because, despite the recent slide in home values, what stocks have put us through has been even worse. Even accounting for the real estate decline of the past few years, home values have in fact outpaced the S&P 500 stock index for the past 10 years. Here's another Pew chart:
Behavioral economists would point out that recency bias is at play here: compared to stocks, housing has done better than stocks, so housing is what captures our investing imagination. The problem is when we let our recency bias get in the way of heeding longer-term trends.
But we're also drawn to housing for all sorts of very important non-financial payoffs. In fact, money matters did not rank in the top 4 reasons people gave for the value of buying a home in the Fannie Mae survey:
1. It means having a good place to raise children and provide them with a good education: 78 percent said this was important
2. You have a physical structure where you and your family feel safe: 76 percent
3. It allows you to have more space for your family: 71 percent
4. It gives you more control over what to do with your living space, such as renovations and updates: 70 percent
Only then do we get to the financial arguments for homeownership.
5. Paying rent is not a good investment: 63 percent
6. Owning a home is a good way to build up wealth that can be passed along to my family: 59 percent
7. Buying a home provides a good financial opportunity: 58 percent
8. It is a good retirement investment: 56 percent.
Overall, only one in three Americans surveyed by Fannie Mae believe that the financial payoff from home ownership outweighs the lifestyle benefits. Yet at the same time, we're still quick to say it's a better investment than our 401(k) or regular taxable investments. So what gives? Well, one generous explanation is that when we talk about a home as an investment, we are combining both financial and non-financial factors into our analysis, whereas when we're staring at our 401(k) statement, it's only about the money.
And it's hard to feel good about investing in stocks these days after the wild ride of the past decade. I suppose it would be surprising if a majority of folks said stocks were a solid investment opportunity right now, given that everyone is so scarred by recent experience. But when it comes to building the assets you will need to live comfortably in retirement, history suggests that stocks deliver the best long-term opportunity for inflation beating gains. A home can be a great lifestyle investment for your family. The fact that it also should generally keep pace with inflation makes it a fine store of value as well. Just don't bet on the house at the expense of the stock market to meet your long-term investment goals.
Photo courtesy of Flickr user woodlywonderworks
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