Two weeks ago, I compared the total return on investment between three stock indices and median sale prices between January, 2000, and March, 2012. Last week I reported on the performance of the Dow Jones Industrial Average (DJIA) versus the rise in the median price of U.S. homes between 1970 and 2010.
The bottom line is that the DJIA closed 13.03 times higher on December 31, 2010, than where it was on January 1, 1970. Over the same period, the median sale price of U.S. homes grew by a factor of 6.83, just a little better than half the growth of the Dow.
What it comes down to is that the rate of return on stocks has, over this particular 40-year period, far outperformed the national median sale price for homes. And youíd have made out like a freakiní bandit if you had bought into the stock market on December 31, 1979, and sold on December 31, 1999, bookending the two best decades in the history of the stock market.
But, if you had bought an average-performing group of stocks on December 31, 1999 and sold on December 31, 2009, you wouldnít have been so thrilled, losing over 9 percent of your investment in that decade. Worse, if youíd sold on March 9, 2009, when the Dow was at 6,547.05, you would have suffered a loss of 43 percent of your investment.
Median residential real estate prices in Boston since 1970 have significantly outperformed the national numbers. I wish I could give you the data to back up the statement, but I havenít been able to find Boston-only data all the way back to 1970. Even with the Case-Shiller Index, which I consider to be the most-accurate measure of the performance of the housing market, I could find local information dating back only as far as 1987. (Again, I invite the research-proficient among you to find some usable data for Boston or Massachusetts home prices stretching back to 1970.)
A major difference between investing in your home versus investing in the stock market: Once you buy a stock, you donít have to keep paying to maintain it. No question, owning a home is immensely more costly than making a similar investment in stocks, because of interest, taxes, maintenance, etc.
Another major difference: You canít live in your stock investment. If you had invested your money in the stock market and never invested in a home at any time since 1970, you would have had to have paid rent. What would you have spent on rent over 40 years?
To illustrate, letís say you would have averaged $1,000 a month in rent for a two-bedroom apartment in a decent location. That seems like a reasonable-enough figure to me. Looking at the midpoint of each decade, letís say it was $400 a month in 1975, $800 a month in 1985, $1,200 in 1995, and $1,600 in 2005.
The simple calculation is that $1,000 a month rent over 40 years comes to $480,000. Yes, there are benefits to renting, such as freedom, a lack of responsibility, and fewer costs associated with renting. But from a strictly financial standpoint, money paid in rent is a total loss.
As I responded to a reader two weeks ago, itís funny that Iíve spent nearly all my time in this space over the past eight weeks talking about the investment aspects of real estate. In my day-to-day work with clients, it almost never comes up. By the time I hear from clients, theyíve already done the math for themselves, and have decided that this is the time for them to make a move. They are not swayed by the Buy-Now, Buy-Now messages from the real estate industry, and theyíre not swayed by the Never-Buy, Never-Buy messages from the naysayers. Theyíve made up their minds for themselves.
Some readers have also commented that Iím holding myself up as an expert in investments. Iím not an expert in that field, and I have not been advising people what to do with their money. I have tried to examine the financial costs and benefits of homeownership. In the past couple of weeks, I have reported on how the residential real estate market has appreciated compared with the stock market.
Let me be clear: Iím a Realtorģ, not a financial advisor. If you want financial advice, talk to a CFA or a CPA or certain kinds of lawyers.
In my very first post in this space, I said I would write about the things people tell me they want to hear about. Since most of the dialogue from readers has been about the specifics of my previous posts, it looks as if these financial/investment details are what Iím all about. I welcome questions which will take me in a variety of new and, ultimately, more interesting directions.
So, if you have a real-estate-related topic youíd like to read about, please, let me know.
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