Some
wealthy Americans today have speculated that buying real estate in this economy
can actually turn around to be a huge financial investment in the long run. But
how many average home-owning Americans could agree to that? With the housing markets
going up one minute and down the next who’s to say that you’ll get the price
you’re asking for when you sell your home or the buy for the offer you put on
the house. Many Americans put their
money in stocks and bonds when they look to invest. But real estate has opened
a new door of opportunity for many to hopefully make a return off their initial
purchase because some believe the investment is greater when you own it. There
may be healthy argument here folks. First, let’s start and address what appears
to be the fact: only small groups of Americans today actually seek buying real
estate as means for an actual financial investment while many others seek home
owning as a life-long investment for their families and generations to come. For those who seek to buy and invest in real
estate must also be careful because of the constant changes in housing markets.
Their ROI can often be greater than the return on the asset. In the
article below, CNN”s Christopher Matthew explains why real estate has become a
new trending topic for many Americans and is warming many up to the idea of
buying again.** Jumoke Akiosi.
Americans Have Fallen in Love with Real Estate Once Again
SOURCE: Christopher Matthews CNN Money
FORTUNE -- As the real estate market
recovers, so does America's faith in housing as an investment.
According to a Gallup poll released Thursday, a plurality of
Americans now think of real estate as the "best" long-term
investment, followed by gold, stocks and mutual funds, savings accounts/CDs,
and bonds:
If one assumes "best" to
mean the investment that offers the highest return, then Americans have things
backwards. Real estate, on average actually returns very little when adjusted
for inflation. Robert Shiller -- the economist famous for helping to create the
widely cited Case-Shiller housing index puts it like this:
Home prices look remarkably
stable when corrected for inflation. Over the 100 years ending in 1990 --
before the recent housing boom -- real home prices rose only 0.2 percent a
year, on average. The smallness of that increase seems best explained by rising
productivity in construction, which offset increasing costs of land and labor.
And since 1990, housing has
continued to be a middling investment, when you take into account the bursting
of the real estate bubble:
When adjusted for inflation, the
average house has appreciated little since 1987. The picture looks a lot
different for the other investments Gallup asked about it in its
polls. The S&P 500, for instance, has produced an inflation-adjusted annual
return of 6.32% since 1929, while investing in
government debt would have returned roughly half that figure. Gold,
interestingly enough, has performed pretty well on an inflation-adjusted
basis, averaging a 4.12% return per year since
the end of the Bretton-Woods monetary order in 1971.
If you break down the Gallup data
into income groups, the answers are even more revealing. For one, wealthy
Americans are more likely to pick stocks as the best investment than any other
income group. This makes sense, as investing in the stock market is -- as the
above data shows -- the best way to become wealthy.
Secondly, it appears as if people
are likely to say investments they own are the "best." According to
the Gallup report:
Upper-income Americans are much
more likely to say real estate and stocks are the best investment, possibly
because of their experience with these types of investments. Upper-income
Americans are most likely to say they own their home, at 87%, followed by
middle (66%) and lower-income Americans (36%). Gallup found that homeowners
(33%) are slightly more likely than renters (24%) to say real estate is the
best choice for long-term investments.
So wealthy Americans are the most
likely to understand that stocks provide the best chance for a higher return,
but they are also not free of the tendency to think that the thing they
are doing (in this case, owning a home) is the intelligent thing to do.
Of course, this analysis takes for
granted the idea that "best" necessarily means the investment that
is most likely to make you the most money. There are, of course, other
reasons why people might decide to invest in real estate. While it
theoretically might make sense for an investor to rent his home and plow the
money he saves on taxes, mortgage interest, and maintenance into the stock
market, such a strategy might not work in the real world. First of all,
people have limited time: They're going to spend a lot of energy choosing a
good place to live, and might not also have the time to wisely manage
securities investments too. Secondly, owning a home is a great way to force
yourself to save money, as each mortgage payment is something you have to make,
lest you risk losing your home.
Either way, if you decide to put
your extra cash into real estate for these reasons, you should be aware that
this is the reason you're doing it. As long as you don't expect your home to
make you a lot of money on an inflation-adjusted basis, invest away.
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