Is there such a thing as a perfect investment? I mean, every investment has advantages and disadvantages, right? Even cash, with its fixed rate of interest after adjusting for taxes and inflation, can be an anchor around the neck of investors. Investors were already familiar with the volatility associated with stock AND bond ownership.
So, what's the perfect investment then? It turns out that investors like their homes.
Every year since 2011, Gallup has asked people what they think the best long-term investment is:
While I had my suspicions that investors generally love the housing market as an investment, I was surprised at how MUCH they loved it.
More than likely, over the last decade, your neighbors, friends, family, and co-workers have all mentioned housing prices going in one direction – and it's not down.
That may be why investors love the housing market. And they wouldn't be wrong.
Looking at Robert Shiller's historical housing price database to calculate the annual returns on a national basis going back to 1950, you find a compelling story to homeownership:
A closer look at this chart shows that only seven years out of 75 were housing negative. That means housing prices were negative only 9% of the time!
Contrast that with the stock market, which has been negative yearly 22% of the time since 1950, and you begin to understand how powerful these numbers are.
Why do housing prices do so well, given that housing is an illiquid asset? As we all know, home ownership can be expensive with property taxes, insurance, maintenance, renovations, realtor fees, closing costs, moving costs, etc.
I think the answer goes a little deeper than just numbers because very few times does anyone make decisions based on just numbers; they usually make them because of the stories that make up the numbers.
The story of the U.S. housing markets has many parts:
- The Housing market is illiquid, which works in FAVOR of your long-term return potential. It is an out-of-sight, out-of-mind type of thing; therefore, the holding period tends to be MUCH longer.
- People like the story of their homes – telling neighbors, friends, family, and co-workers about their latest housing projects like kitchen or bathroom updates or maybe a new home addition. Landscaping projects also make for good water cooler conversation.
- When panic hits, the last thing people want to do is to sell their homes. It's not as easy (or convenient) to buy and sell a house as it is to click a button and trade your 401(k), thereby adding length to an already long timeframe, which helps to ease the fear from panic and add to your potential long-term growth.
- Timing and luck are siblings of the same shoulder shrug. In many cases, the key to good returns in real estate are byproducts of timing and luck. When timing and luck don't work in the investors' favor, many times, it's shrugged off with the property being held until negative equity disappears.
- It’s the one asset where volatility is hardly a consideration (the exception is when your house's assessed value increases, which means your property taxes are going up). You can’t see the second-by-second price changes in your home like you can in your investments. When you’re not checking the value every moment, you’re likely to have a longer-term mindset when it comes to ownership.
I am by no means making a case that housing is a better investment than equities, bonds, or cash.
Successful real estate investing depends on many factors; while some investors will make out quite well, for others, it will be their biggest albatross with the most headaches.
And just because housing has been good for the last several years doesn't mean it will be good in the next several. Nothing is guaranteed, and the mess created by bad COVID policies has yet to fully work through the system.
It is best to concentrate on maintaining your diversified asset allocation within your financial plan rather than chucking your investment strategies out the window in favor of buying the house next door.
Stay the course, my friends.