Working in investments, it was always surprising to me that there is no strong consensus among professionals on the financial merits of home ownership. I was taught early on that home ownership was a lifestyle choice, and usually a bad financial choice. So buy one if you want to own a house, not because it's a good investment. This made sense to me, since home ownership goes against a lot of the conventional wisdom of investing (active, leveraged, not diversified, negative cash flow, low risk/return profile, etc.).
But I also regularly meet financial analysts, portfolio managers, and CFOs that love home ownership over stocks as an investment. These are generally well educated financial professionals, so I assume they have a reason for thinking this. When I bring up the conventional arguments, they'll counter with points about tax benefits and the leverage being relatively cheap and actually a good thing. That's usually where the conversation ends, because neither of us will have the numbers to back up the economic value of the leverage and tax benefits, so we just end up agreeing that "it depends".
So I did a deep dive analysis myself. The St. Louis Fed provides housing price and mortgage data from 1975. On a pure return basis, there's no question that equity dominates housing over that time period. The SP500 total return is 13,114%, or 12.0% annualized. US housing is 675% or 4.5% annualized. However, making some adjustments for leverage and tax, the difference is much smaller. SP500 is 10,923% or 11.5% annualized, and housing is 3,571% or 8.7% annualized.
This is a small enough delta that I can now see how there are plenty of specific personal situations that would push housing above equity as a preferred asset class. On average, stocks are probably better, but for some people, housing might be. "It depends" is actually a very accurate answer. As an example, I did the same for California housing specifically, and it came out to 9,131% or 11.1% annualized. Just one change and already housing has almost caught up to stocks on an absolute return basis.
Anyway, thought this might be a question some of you have also been meaning to look into, and just haven't had the time. In addition to sharing, I also wanted to put my calculation out there for critique. I know there are major simplifying assumptions I've made, including a mortgage that fluctuates based on housing value, and multiple instances of straight line averaging instead of compounding, but I'm wondering if any of my assumptions are a big enough distortion to render the analysis grossly inaccurate.
Spreadsheet link: http://ift.tt/2CkLle7
EDIT: Wow I just realized I missed a major factor. This analysis ignores rent entirely. Maybe I'll take another crack at it tomorrow morning. (Or someone else can using the spreadsheet.)
Submitted December 31, 2017 at 02:26AM by Tiancius http://ift.tt/2BYZVob
