One More Time, Real Estate is a Great Investment

In a recent blog post on Marginal Revolution, economist Alex Tabarrok discussed homeownership as an investment.

Here is what Mr. Tabarrok had to say:

“Housing is overrated as a financial investment. First, it’s not good to have a significant share of your wealth locked into a single asset. Diversification is better and it’s easier to diversify with stocks. Second, unless you are renting the basement, houses don’t pay dividends. Stocks do. You can hope that your house will accumulate in value but don’t count on it. Indeed, you should expect that as an investment your house will appreciate less than does the stock market. You didn’t expect to get a great investment and a place to live in the meantime, did you?”

Here is a rebuttal:

We have reported many times that the American Dream of homeownership is alive and well. Tomorrow, we’ll touch on the personal benefits to homeownership.
Eric Belsky, the Managing Director of the Joint Center of Housing Studies at Harvard University expanded on the top financial benefits of homeownership in his paper -The Dream Lives On: the Future of Homeownership in America.
Let’s use some quotes from Belsky’s study to address comments by Mr. Tabarrok:

Tabarrok:

“Housing is overrated as a financial investment.”

Belsky:

“Since many people have trouble saving and have to make a housing payment one way or the other, owning a home can overcome people’s tendency to defer savings to another day.”

Tabarrok:

“You can hope that your house will accumulate in value but don’t count on it. Indeed, you should expect that as an investment your house will appreciate less than does the stock market.”

Belsky:

“Homeownership allows households to amplify any appreciation on the value of their homes by a leverage factor. Even a hefty 20 percent down payment results in a leverage factor of five so that every percentage point rise in the value of the home is a 5 percent return on their equity. With many buyers putting 10 percent or less down, their leverage factor is 10 or more.”

Tabarrok:

“You didn’t expect to get a great investment and a place to live in the meantime, did you?”

Belsky:

“Homeowners pay debt service to pay down their own principal while households that rent pay down the principal of a landlord.
Homeowners are able to deduct mortgage interest and property taxes from income...On top of all this, capital gains up to $250,000 are excluded from income for single filers and up to $500,000 for married couples if they sell their homes for a gain.”

Bottom Line

We realize that homeownership makes sense for many Americans for an assortment of social and family reasons. It also makes sense financially. If you are considering a purchase this year, contact a local professional who can help evaluate your ability to do so.