MYTH# 5: A House is a Safe Investment

Reality: There are very few risk-free investments and a house is certainly not one of them.

House prices are not a one-way escalator going up. They can also go down. Predicting whether a specific house in a specific market will appreciate is very difficult. As financial columnist Jane Bryant Quinn noted, “any single [house] sale is as much a lottery as trading stock is.”[10]

If prices do fall even slightly and you have taken out a low or no-down payment mortgage, you could find yourself owing more on your house than it is worth.

Plus, experience suggests that even in a booming housing market, you’d probably earn more on your money in stocks than in real estate. According to the editors of SmartMoney magazine, “compared with the average share prices or even bond returns, house prices plod up at a very slow rate: since 1979, about 4.4% a year.

If you can’t do better than that in the stock market, you need to fire your broker.”[11] In 2001, Harvard University’s Joint Center for Housing Studies found that “in many places at many times, and for many holding periods during the past 15 years, renting made better financial sense than owning.”[12]

Reality Check

“In short, this investment [homeownership] is not a slam dunk. For decent returns on any home, you need either stupendous luck or a holding period long enough to amortize your many costs.”[13]

Jane Bryant Quinn

Newsweek Columnist

“In many places at many times, and for many holding periods during the past 15 years, renting made better financial sense than owning.”[14]

Harvard University

Source: National Association of

Realtors; CRSP: Lehman Bros.

NOTES.

10. Jane Bryant Quinn, “Home Prices Bounce Back: But a third of buyers won’t hold their property long enough to make money.” Newsweek, March 16, 1998.

11. Jersey Gilbert, “Is Your House Really a Good Investment?” SmartMoney, February 2002.

12. The State of the Nation’s Housing 2001. Joint Center for Housing Studies of Harvard University, 2001.

13. Ibid

14. “Rent vs. Buy Calculators: How Helpful Are They?” Research Notes, National Multi Housing Council, June 29, 2001. www.nmhc.org/Content/ServeContent.cfm?ContentItemID=1159&IssueID=80

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