Makin' Money

The real long-term return on housing: Zero!

Chris Farrell Mar 25, 2011

The housing market has been in the tank for years now. The latest figures say it won’t get better anytime soon. But this century long chart from Visualizing Economics makes an intriguing case that home ownership never has been a good investment. The inflation adjusted return (the so-called real return) is about zero. That’s right: 0%.

The nominal price (no adjusting for inflation) is up a lot over the century, however. According to this chart, a $10,000 house in 1890 would be worth about the same in real dollars in 2010. But it would be worth more than $350,000 in nominal dollars.

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I know all the stories about people making vast sums of money off their houses. A home offers plenty of tax benefits, including the deductibility of mortgage interest payments and no capital taxes due on home sale gains under half-a-million dollars (for joint filers).

But those gains are offset after factoring in the costs of ownership, including mortgage interest payments and property taxes. The cost of maintenance is steep. So are the improvements you make.

The long-term data comes from Yale University economics professor Robert Shiller. He has long argued that it’s hard to make real return on residential real estate in the U.S. because there has been and remains so much available land for new homes.

Catherine Mulbrandon, the founder of Visualizing Economics, addresses a key question: If you’re a home seller, which price matters more: Real or nominal?

If a seller is holding a mortgage then the question is: Can I sell for more or less than I owe? Since that loan amount is not adjusted for inflation then the nominal value is more importent both the seller and the mortgage holder. It is when nominal prices fall that banks have trouble with high rates of mortgage defaults. But if you are looking at the long-term value of real estate as an investment (compared to stocks or bonds) then you need to take into account the real growth.

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