Tags: Housing | investment | S&P 500 | Fed

Atlanta Fed: Housing Is Not a Great Investment

By    |   Wednesday, 14 Aug 2013 08:21 AM

Housing may not be the secure long-term investment it's commonly thought to be, new research from the Atlanta Federal Reserve shows.

Homes values rarely have returns better than the Standard & Poor's 500 index does, according to the study by Atlanta Fed researchers Ellyn Terry and Jessica Dill.

The study assumed the home was owned for 13 years, the average length of homeownership.

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"If a home is purchased only as an investment and not as a place to live, this comparison of average annual returns clearly shows that investing in equities offers favorable returns more often than investing in housing," the researchers wrote.

The two computed the average annual return of home prices across all possible combinations of start and stop points using the Shiller house price series from 1926 to 2012. They found that returns were concentrated around zero, with most leaning into positive territory.

The average annual returns for a home owned 13 or more years is substantially less volatile than for one held less than 13 years, and those investing for the longer term were much more likely to have positive returns.

"The weighted average annual return of the S&P 500 is 4.55 percent, compared to 0.97 percent for the Shiller real home price index," the economists noted.

Their study doesn't take into account what homeowners save if their mortgage replaces rent, they concede. According to some calculations homeowners who buy a home today and hold it for seven years can expect to pay 44 percent less than people who rent.

Robert Shiller, a Yale University economics professor who helped create the Case-Shiller index, has said home prices adjusted for inflation increase only 0.2 percent a year on average and that stocks offer a better long-term investment. The Atlanta Fed researchers said Shiller's estimate was "not far off the mark."

Bill McBride of Calculated Risk disagrees with Shiller, saying there are shortcomings with the indexes he used.

In his book "Irrational Exuberance," Shiller used the FHFA index for home prices between 1975 and 1986, which is based on a small percentage of real estate transactions. The CoreLogic index and the Freddie Mac quarterly index, which include a larger share of the market, show a clear upward trend in home values, McBride argues in his blog.

"A key reason for the upward slope in real house prices is because some areas are land constrained, and with an increasing population, the value of land increases faster than inflation."

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Housing may not be the secure long-term investment it's commonly thought to be, new research from the Atlanta Federal Reserve shows.
Housing,investment,S&P 500,Fed
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2013-21-14
Wednesday, 14 Aug 2013 08:21 AM
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