What follows is the second of seven to-the-point articles highlighting poor investments you should avoid.
2 of 7: Your House/Residential Real Estate
Your house is today’s loser.
Your parents bought the house they live in, in the Year of our Lord, 1953 for the grand sum of $18,080. They sold it year before last for $271,768. Wow, mom and dad did good … didn’t they … well, didn’t they!?!
Well, relative to other home owners, they did just fine because these figures perfectly match 1953 and 2017 median home price data.[1]
Further, when you consider that they raised you here and held great bar-b-que’s in the back yard every summer, the place was, as Mastercard has put it, priceless. This was home. That’s where you used to shoot hoops with dad. There is where little Bosco showed up on the porch with no collar.
But, as far as an investment, how did mom and dad do? $18,080 to $271,768 over 66 years, adjusted for inflation, equates to a .67% real return and even this puny figure is a big lie. Know anyone that spent less than .67% per year on real estate taxes, insurance and home maintenance? HVAC, roof, the driveway. Me neither. When you consider expenses, their annual costs consistently outstripped any real return.
According to the Case Shiller Home Price Index, the Bible of such indices, the real return on residential real estate for the 60-year period ending in 2017 was .63%.[2]
In the realm of investments, that is really, really bad.
We could end there, but let me provide five additional problems forever relegating your home to the realm of poor investment:
- Home Equity is Trapped Equity
If you buy a house to live in and your house appreciates meaningfully in value, it will require a Goldilocks set of circumstances to allow you to unlock that value. If you occupy a 3000 sq. ft. home in a hot neighborhood and are ready for a 1700 sq. ft. fixer upper, and you are that super-handy guy who is going to do the work yourself, you are about to make some money and improve your personal balance sheet. That’s not me and it’s not most people. Said another way, it doesn’t practically help all that much when the place you live in appreciates. It’s better than the alternative; just not as meaningful as one might think at first glance. Most often, home equity is trapped equity.
- Exorbitant Carrying Costs:
If you live in Atlanta and pay city and Fulton County taxes, you know you’ve got a sizable bogey to overcome every year to simply make your taxes back. That’s true in most markets across the country boasting strong demographics and the correlating outsized home price appreciation. While housing may beat racing horses and vineyards for carrying costs, it gets a drumming from standard investments like stocks and bonds.
- Punishing Transaction Costs:
Don’t take this as a knock on realtors. Blame them or blame the complexities of locating and purchasing a home. Either way, in a world in which markets have democratized and transaction costs have been dramatically reduced in many areas, 6% of the sale price on both sides is punitive when you get out the HPbII+ to calculate your investment return.
- Illiquidity:
Liquidity is huge and, on this front, residential real estate is the guy sitting in the back of the class, firing spitballs, likely to get an F. It is way too hard to get in and out of residential real estate.
- Negative Cash Flow:
Analyzing an investment often begins by looking at cash flow. Hmmm. Cash only flows out at my house.
In closing, look, I don’t mean to be negative and, in reality, I’m making no serious case against home ownership. When you sit on your back porch this weekend, lean back and fully enjoy it. Soak up the spring air and enjoy your family’s castle and do so knowing that you are paying for it. This article’s title calls your house an “investment” that you should avoid; that doesn’t mean your home can’t be considered a “reasonable usage cost.”
You can buy the dream home, but don’t buy it for the alpha returns or you are likely to be sorely disappointed.
[1] New and existing homes / based on data from the National Realtors Association, FHFA and Robert Shiller’s work
[2] Index moved from 140.47 to 204.71 over this period
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