Dennis Norman
Asking this question now is about like asking a newly divorced person their thoughts on marriage….nonetheless in challenging times many of us reflect upon our past investment decisions, investment philosophy, etc and see what can be learned from our past to help us in the future.
Is the American Love Affair with Home Ownership Over?
A few months ago I was on a conference call with Robert Shiller,a Professor of Economics at Yale University and the namesake behind the Case-Shiller Index, which is arguably the most respected housing price index in the country, during which Mr. Shiller expressed concerns about homeowners changing their sentiment on home ownership to that of an investor. He was saying this because the average amount that homeowners were underwater on their mortgages had just broke through level where, historically, a homeowners attitude toward their home changed in such a manner. The problem with a homeowner thinking like an investor is the emotional part of owning a home is replaced with a more business-like mindset which, for many underwater homeowners, leads to the realization that they are throwing good money after bad and it makes more sense to walk away. Mr. Shiller’s concern was, with so many American’s underwater, if this happened, then the market would continue to be flooded with foreclosures and home ownership would lose it’s luster.
Well, if a couple of recent survey’s of homeowners are correct, American’s may be feeling a little beat up as a result of owning a home, but, for the majority, they are still love the idea of owning a home and think it’s a good investment. So, much like the newly divorced person that swears they are done with marriage and will never get married again only to end up at the alter 12 months later, American’s seem willing at this point to give their homes another chance.
Confidence in a Home as an Investment Drops but Still Strong
According to a survey done in May 2010 by the Pew Research Center , 80 percent of homeowners surveyed said they believe a home is “the best long term investment” they can make. This is in spite of the fact that about half (48 percent) of the homeowners in the survey said their home is worth less now that it was before the recession began, and of these, nearly nine-in-ten predict it will be at least three years for their home to return to it’s pre-recession value.
Source: Pew Research Center
I think, given what the market has been though, this is pretty encouraging. It does show a fairly dramatic change in attitude on the part of homeowners however. As the chart shows, in 1991 49 percent of homeowners strongly agreed that a home was the best long term investment as compared with 39 percent in 2010, a decline of 20 percent in the 19-year period. The number of homeowners that somewhat agree was 35 percent in 1991 and has increased 17 percent to 41 percent in this current survey so it seems the majority of the homeowners lost from strongly agree fell into this category. There has, however, been a 75 percent increase during the period in the number of people that strongly disagree that a home is the best investment going from 4 percent in 1991 to 7 percent in 2010.
Hardest-Hit Homeowners Not As Optimistic
Source: Pew Research Center
Not surprisingly, the survey shows those homeowners that have been hardest-hit by the recession are not as optimistic about a home as an investment as those that have fared better, however they are still rather optimistic I think, given the circumstances.
Of those surveyed, over one-in-five homeowners (21 percent) said they were “underwater”, owing more on their mortgage(s) than their home is currently worth. Of these homeowners 73 percent said they still felt their home is the best investment they can make, compared with 86 percent of homeowners that ere not underwater feeling their home was their best investment.
The survey showed almost 50 percent (48 percent) of the homeowners said the value of their home has went down during the recession. Seventy-eight percent of these homeowners still view home ownership as a good investment though, compared with 88 percent of those whose homes increased in value during the recession.
A Home is More Than Just an Investment
Back in December 2008 I wrote a post about “The Real Value of a House” in which I suggested, among other things, that we make “history” in our homes, family history, and that as a result “perhaps the real value of our home to us far exceeds the price someone would pay for it.” I guess this survey shows their is truth to this…American’s haven’t given up on home-ownership.
The Stock Market Beats Home Ownership Purely as an Investment
Further proof that American’s look at home ownership as more than just a financial investment and count non-monetary benefits as “returns” on their investment, comes in a report done by Jack Clark Francis, with the Dept of Economics and Finance at Bernard Baruch College and Roger Ibbotson with the Yale School of Management title “Contrasting Real Estate with Comparable Invesments, 1978-2004“. In this study Francis and Ibbotson take an in depth look at the real estate market over a 26 year period and compared how an investment in real estate during that period fared against other types of investments such as stocks, bonds and commodities. Before I go further, note that the period their study includes stops during the real estate boom so their results were not impacted by the crash we have witnessed in the real estate market over the past couple of years.
The results of their study showed that, over the period, residential real estate had a mean rate of return of 8.66 percent per year which, of the 17 different investments they look at, produced the third-worst return, with Farm’s producing the lowest return at 6.07 percent and 1 year U.S. T-Bills the second-lowest at 7.18 percent (although remember, the return on T-Bills is guaranteed). Coming in forth for the lowest return was commercial/business real estate at 9.70 percent. The remaining 13 investments all produced double-digit annual returns with U.S. small stocks leading the way at 18.14 percent followed by Real Estate Equity trusts at 15.78 percent and the S&P 500 at 14.56 percent. The sturdy also pointed out that real estate, as an investment is much less liquid, and requires constant maintenance and attention versus “paper” investments which have liquidity and require no maintenance.
So I think we can conclude that if we were just going to look at our homes as an investment we would all become renters and put our money into the the stock market. However, since we don’t do this, and the survey above clearly shows American’s look at their homes as a good investment, then I think it is safe to say, as I did above, that American’s put value on the other “return” they receive by home ownership (or, just to put on my glass is half-empty hat, maybe they don’t know the returns they can get on their money in other investments).
We are doing our own little quick poll/survey on the topic…please take a quick moment and answer our one-question poll in the upper right corner of this site and let us know if you think a home is a good investment…Thanks..
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