Posts Tagged ‘young investors’

Americans vs. Reality: Why Your Home is Not a Good Investment

Re-posted from: http://www.fool.com/investing/general/2014/05/02/the-uncomfortable-reason-your-home-is-not-a-great.aspx

home_large

Check out the graph below by Noel Prize winning economist Robert Shiller.  The lesson is that a home is great to meet your housing needs, but not great as a long-term investment.  Shiller — who won the Nobel Prize last year — is regarded as the world’s foremost housing expert. He has married historical data with deep insight into human psychology to offer some of the best housing analysis anyone’s ever produced.

“The housing boom in the early 2000s was driven by a sense that housing is a wonderful investment. It was not informed by good history,” Shiller said. Most people now agree on that much.

“If you look at the history of the housing market, it hasn’t been a good provider of capital gains. It is a provider of housing services,” he explained.  By that, he means a home gives you a place to live, a place to sleep, a place to store your stuff.  But that’s it. Americans believed — and still believe — that the value of their home will increase above the rate of inflation.

In the 2000s Shiller noticed that nobody had created a chart tracking national home prices historically, over the long term.  So he did it himself.  “The strange thing is, nobody else had ever made a plot like that. I can tell you, no one had ever seen that picture,” he told me, shaking his head in disbelief. “People plot all kinds of data. Why wouldn’t someone have done that? I still haven’t figured it out.”

The chart, measuring nationwide home prices adjusted for inflation, was this one:

realhome_1_large

From 1890 — just three decades after the Civil War — through 2012, home prices adjusted for inflation literally went nowhere. Not a single dime of real growth. For comparison, the S&P 500 increased more than 2,000-fold during that period, adjusted for inflation. And from 1890 to through 1980, real home prices actually declined by about 10%.

It’s important to reiterate what a home does do: It provides a place to live. A place to raise your kids. A place to spend the holidays with your family. A place to barbecue with your neighbors. Even a place to rent out. That has tremendous value, of course. Shiller owns a home. He’d buy another if he needed one. “Basically, if I were in the market right now because I wanted a house, I would buy a house,” he said.

The problem is that Americans expect more out of their homes than just a place to live. In 2010 — years after the housing bubble burst — Shiller’s surveys showed Americans still expected their home to appreciate by more than 6% a year over the following decade. If history is any guide, that’s probably about twice as fast as they’ll actually appreciate by. Despite the housing crash, people still expect stock-like returns out of their homes.

Since a home is most Americans’ largest asset, you can see how this becomes a problem. When you have inflated expectations about the largest asset you own, you walk down the path of financial disappointment.  Everyone should live in a home they can afford and provides the lifestyle they desire. But assuming it’s a superior long-term investment, one to rival stocks, is dangerous.

My addition: Of course, there are exceptions to the general rule some specific areas where homes will increase in value.  Areas undergoing gentrification is a great example of areas that generally appreciate in value.  But the key to remember is that those are exceptions to the general rule.  If you’re buying a home as a long-term investment (and not just to meet your housing needs), make sure you have data to explain why your home is an exception to the rule.

 

Advertisements

Stocks are still on sale, BUY, BUY, BUY!

Yes, that’s right, I said it, stocks are still on sale. My ROTH IRA (Individual Retirement Account) earned a 15.95% increase from March 2010 to today.  Most of the increase was due to the overall stock market doing better. During the recession, stock prices crashed hardcore.   Two things determine stock prices:

  • Fundamental value of the company: company’s annual profit, upcoming products/services, and the cash you’d make by selling all the company’s assets
  • Perceived value by investors: people’s opinion of how well a company’s going to do in the future

During a recession, the fundamental value of a company changes some and the perceived value changes A LOTPeople worry that the economy won’t recover and forgot that recessions happen periodically. They see their investment balances dropping fast, become terrified, and sell their stocks.

Stock prices continue to drop until people feel comfortable investing again.  This is the best time to buy!  It’s a sale.  

Stock prices in a recession resemble a post-Christmas sale—which are the lowest prices of the year. (When else can you buy a $300 Banana Republic jacket for $15?) Think of a recession as a surprise sale (a cyclical discount on stocks).

If you have extra cash now, buy! If you don’t have cash, get ready for the next major sale. It will happen. We’ve had 4 recessions since 1982 (Dec 2007 – June 2009, March 200 1- Nov 2001, July 1990 – Mar 1991, and July 198 1– Nov 1982).

During the next recession when everyone else is running out of the market, we’ll come in with buckets of cash, buy stocks on sale, and bolster the economy!  Ha, buying during a recession helps you and helps the national and world economy! Call that my community service message for the day.

——————

Have you been investing during or after the recession? If not, are you thinking about getting in? Share your experience!