How Not to Ruin Your Life
A Home Truth about Real Estate Investing
In 1978, my wife and I bought an adorable little condo near Palm Springs as a spot to relax and play with our Weimaraner dog, Mary.
It was a tiny place, but we loved it. We paid $100,000 or so for it. Four years later, we got bored with the place and sold it for about $125,000. That was in 1982.
Now we have a place nearby that we enjoy, and were looking for a smaller place in which to put up our guests. By complete coincidence, a condo very similar to the one we sold in 1982 came on the market and I went to look at it. A lovely spot, to be sure. But the asking price? $345,000.
The Buts and What-Ifs
That means the house has kept up with inflation -- barely.
In fact, when I do the math, I realize that it hasn't fully kept up with inflation. Plus, the owner would have had to pay rental fees (it's on land leased from a Native American tribe), condo fees, taxes, and insurance. Granted, he would also have gotten the great pleasure of living there, but it wouldn't have been a great investment at all.
On the other hand, if the same person had bought the Dow in 1982, he would've made roughly 10 times the money by now, not counting dividends, which would have meant he would've made close to 20 times the money.
There are lots of "buts" and "what ifs" in real estate, to put it mildly. There are neighborhoods along ocean fronts, lake fronts, and in New York City and San Francisco where anyone would've made a fortune buying real estate in 1982.
Prices in some parts of Manhattan, along Florida's coasts, and in Malibu have gone up substantially more than in Palm Springs. Usually, the key to low real estate price growth is an abundance of land to build on, such as in Phoenix or the Palm Springs area. The key to high real estate growth is a prestigious neighborhood or an extreme shortage of space, such as ocean front in Malibu.
Taking Stock
Still, my wife and I bought our house in Malibu for $600,000 in 1990. It might have gone up by 150 percent since then, but in that span, the stock market has more than tripled on the Dow, counting dividends. Other indexes such as foreign stock indexes have gone up vastly more than that.
Now, more "buts" and "what ifs": There are long periods when the stock market doesn't make you much money. The S&P is still lower than it was seven years ago. Stocks adjusted for inflation lost about 80 percent of their value in the slump of the 1970s and part of the 1980s. So nothing is a slam dunk.
Professor Robert Shiller of Yale has demonstrated, however, that over very long periods homes barely keep pace with inflation. Stocks, over very long periods, beat inflation by a large margin. (Please remember that "over very long periods" part. You can easily buy at a peak and not see that peak again for many years. But barring war, you will see it -- and zoom past it.)
There are many, many good reasons to buy a home -- and a vacation home -- besides price. There's much joy to be had in living inside a house that's yours on land you own (or lease from the Morongo Indians). But as an investment, homes -- unless bought with an eye to scarcity or in prestigious neighborhoods, and even those sometimes don't work -- are to be lived in, loved, and passed on.
I myself love houses, and own a lot of them. I get immense joy from them. But for long-term gains, broad indexes (also called indices) of stocks are where you want to be.
A Living Investment
Again, I don't want to disparage real estate. As you know, I usually write about how to make money, usually by investing but sometimes also by improving your human capital. But spending money is also a part of life, and buying things you like and get a lift from is a big part of life. The only things I know of that can do both are homes.
Yes, I realize I wrote above that they weren't a great investment compared with stocks on broad indexes, and they're not. But they'll keep their value a lot better than cars or jewelry or clothing or trips to Hawaii.
They'll also give you a fabulous sense that you have a fortification against landlords, neighbors sending yucky cooking smells into your apartment, and a lack of control over your own dwelling.
Great, But Not Perfect
Maybe it's just me, but I get great joy from knowing that I'm within my own four walls, owned jointly only by little old' me and the bank. As far as I can tell, houses -- or condos -- are the only items you can both own and enjoy as a consumer good and also as an investment.
Moreover, if you land in the right neighborhood or hit the right swing in the cycle, they can even be a great investment. Now is a very nice time to start owning, with prices way down in most of the United States.
Again, you won't make as much in the long run as you would on stocks, but no one I know can live inside a stock, make love inside a stock, read a story to a child inside a stock, or lie in bed reading next to their dogs in a stock.
So, yes, real estate rules. It's a good, even great, investment -- just not the perfect investment.
