[Paleopsych] NYT: In the Long Run, Sleep at Home and Invest in the Stock Market
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Sun Sep 4 00:43:37 UTC 2005
In the Long Run, Sleep at Home and Invest in the Stock Market
By MOTOKO RICH and DAVID LEONHARDT
The housing boom of the last five years has made many homeowners feel
like very, very smart investors.
As the value of real estate has skyrocketed, owners have become
enamored of the wealth their homes are creating, with many concluding
that real estate is now a safer and better investment than stocks. It
turns out, though, that the last five years - when homes in some hot
markets like Manhattan and Las Vegas have outperformed stocks - has
been a highly unusual period.
In fact, by a wide margin over time, stock prices have risen more
quickly than home values, even on the East and West Coasts, where home
values have appreciated most.
When Marti and Ray Jacobs sold the five-bedroom colonial house in
Harrington Park, N.J., where they had lived since 1970, they made what
looked like a typically impressive profit. They had paid $110,000 to
have the house built and sold it in July for $900,000.
But the truth is that much of the gain came from simple price
inflation, the same force that has made a gallon of milk more
expensive today than it was three decades ago. The Jacobses also
invested tens of thousands of dollars in a new master bathroom, with
marble floors, a Jacuzzi bathtub and vanity cabinets.
Add it all up, and they ended up making an inflation-adjusted profit
of less than 10 percent over the 35 years.
That return does not come close to the gains of the stock market over
the same period. The Standard & Poor's 500-stock index has increased
almost 200 percent since 1970, even after accounting for inflation.
Yet investment advisers worry that this reality is getting lost in
today's enthusiasm for houses, even as some economists say the housing
market has peaked. People are buying homes purely on speculation,
trading real estate almost as if it were a stock. Surveys show that a
large majority of Americans consider real estate to be a safer
investment than stocks.
"With how strong the real estate market has performed, there is the
urge for people to chase returns," said Jeff A. Weiand, executive vice
president of RTD Financial Advisors in Philadelphia. "But it's very
difficult to beat the long-term historical record of stocks."
Since 1980, for example, money invested in the Standard & Poor's 500
has delivered a return of 10 percent a year on average. Including
dividends, the return on the S.& P. 500 rises to 12 percent a year.
Even in New York and San Francisco, homes have risen in value only
about 7 percent a year over the same span.
That does not mean real estate is a bad investment. It is often an
important source of wealth for families. But its main benefit is what
it has always been: you can live in the house you own.
"The biggest value of the house is the shelter it provides," said
Thomas Z. Lys, an accounting professor at the Kellogg School of
Management at Northwestern University. "Too many people are fixated on
speculation whereas most of the benefit really comes from usage."
Despite the fact that home values usually appreciate over time, most
of the value of a house actually comes from the ability to use it. In
this way, it is more like a car, albeit one that does not become less
valuable over time, than it is like a stock. Whenever people sell one
house, they must immediately pay to live elsewhere, meaning that they
can never wholly cash out of a home's value.
Including the value of living in a house - that is, the rent that a
family would have to pay to live in an equivalent house elsewhere -
homes in New York have returned more than 15 percent a year since
1980, according to an analysis by Mr. Lys.
But only five percentage points of this return comes from sheer price
appreciation, as opposed to the value of shelter. Mr. Lys accounted
for property taxes, spending on renovations, interest payments and the
tax deductions on those payments, and the fact that most house
purchases are made with mortgages.
When the sale of a house brings in a cash windfall, homeowners tend to
focus on the fact that they made a down payment that was just a
fraction of their house's value, lifting their return. But many forget
just how much money they spent on property taxes, a new roof and the
Add to all these factors the corrosive effect of inflation, and the
returns are even lower.
The Jacobses - she is an administrator for a magazine and he a lawyer
- were quite pleased with the sale of their house in New Jersey. To
them, it was a place to raise their two children more than it was an
When the couple spent about $100,000 to redo their master bathroom,
install a walk-in closet and build a deck in the mid-1980's, Mr.
Jacobs recalled saying to his wife, "We'll never get the money out
that we put into this, but at least we'll enjoy it for 15 years or
Told of the comparative returns on his house and the stock market, Mr.
Jacobs said, "Of course I couldn't live in the portfolio."
Today, however, he has come to see the advantages of the stock market.
The Jacobses now rent an apartment on the Upper West Side for more
than $4,000 a month and have invested the proceeds from the house sale
in the stock market, making it easier for them to raise cash by
"I didn't want to take the money that we pulled out of the house and
have all that money tied up in an apartment where I still have
expenses of maintenance fees," Mr. Jacobs said.
But many people seem to be going in the opposite direction from the
Jacobses. Eighty percent of Americans deemed real estate a safer
investment than stocks in an NBC News/Wall Street Journal poll done
this spring, while only 13 percent said stocks were safer.
Part of that sentiment is driven by the recent memory of the stock
market collapse in 2000. Many homeowners seem to have forgotten that
less than 15 years ago house prices in the Northeast and California
fell, but the money they lost on technology stocks is still fresh in
Stocks are also more volatile, and their price changes can be viewed
every day. "The news doesn't report to you daily that your house price
might have gone up or down," Mr. Lys said. "So you think your house
price is more stable than it really is because you don't observe these
Economists caution that any comparison between real estate and stocks
is tricky, because real estate is typically a leveraged investment, in
which a home buyer makes a down payment equal to only a fraction of a
house's value and borrows to finance the rest. While it is possible to
borrow money from a brokerage firm to buy stocks, most individual
investors simply buy the shares outright.
When home prices are rising, the leverage from a mortgage lifts real
estate returns in the short term. Someone putting down $100,000 to buy
a $500,000 home can feel as if the investment doubled when told that
the house is now worth $600,000.
But the power of leverage vanishes as homeowners pay off the mortgage,
as the Jacobses have. Leverage also creates more short-term risk,
especially for those who have stretched to afford their house.
"If the home went down by 30 percent, you'd probably be sitting with a
bankruptcy attorney," said Jonathan Golub, United States equity
strategist at J. P. Morgan Asset Management in New York. "If your
I.B.M. stock goes down by 30 percent, no big deal. So you had
$100,000, now you have $70,000. You don't declare bankruptcy; you just
don't go out to the movies as much, or you retire a year later."
But such risks are hard to imagine when many markets are still
enjoying double-digit percentage increases every year. The number of
people buying houses they do not plan to live in has surged. There are
also Internet exchanges where investors can trade yet-to-be-built
condominiums or futures contracts tied to average home prices in big
But economists and investment advisers say that most of the value from
real estate comes not from anything that can be captured by flipping
it, but from the safety net it provides in bad times. Even if the
market shifts downward, "you have a roof over your head," said
Jonathan Miller, a real estate appraiser in Manhattan.
Beyond the shelter it provides, the biggest advantage of real estate
might be that it protects people from their worst investment
instincts. Most people do not sell their house out of frustration
after a few months of declining values, as they might with a stock.
Instead, they are almost forced to be long-run investors who do not
try to time the market.
Harlan Larson, a retired manager of car dealerships near Minneapolis,
still regrets having bought Northwest Airlines stock at $25 a share a
few years ago. It is now trading at less than $5.
By comparison, he views the four-bedroom home he bought for $32,500 in
1965 - or about $200,000 in today's dollars - as a money tree. He and
his wife recently listed it for $413,000. That would translate into an
annual return of 1.2 percent, taking into account inflation and the
cost of two new decks and an extra room.
They plan to move to Texas after it has sold. "I wish I'd bought more
real estate," Mr. Larson said.
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