According to a recent Gallup poll, more Americans are beginning to view real estate as a viable long-term investment. Thirty percent of those surveyed early last month took this view, up from 25% just a year ago. Gallup credited an improving housing market as being the chief driver of the change in popular opinion on this matter.
But, wait. Some experts, notably Yale economics professor Robert Shiller, disagree heartily with this view. In interviews over the past couple of years, Shiller referred to his research in which he studied home price appreciation from 1890 to 1990. He found that, considering costs of construction and inflation, homes really didn't appreciate in value at all.
Does that mean that buying a home is a lousy move? Not at all, and here's why.
How do you define "investment"?
According to Investopedia, an investment is the purchase of an asset "with the hope that it will generate income or appreciate in the future". Therefore, you may purchase a single-family house with the hope that it will appreciate, and it becomes an investment. Whether it is a good investment, of course, remains to be seen. Buying a duplex, by this logic, would qualify as a good investment, due to the ability to rent one side, therefore generating income, while living in the other.
But what if, as Shiller has suggested, you forgo buying altogether, and rent? You could then take the amount of a home's down payment and invest it in another vehicle, such as stocks. Currently, the S&P 500, for instance, has returned an average of 7.3% over the past 10 years.
Due diligence is key
That sounds a whole lot better than the 0% return on housing that Shiller refers to, doesn't it? But that scenario presupposes that you leave that money alone for the long term. Buying and selling at the wrong time can cost you big time, and, according to recent data, most people hold onto stocks for only around six months. Many buy high and sell low, eroding returns.
The same goes for housing, as those who became caught up in the foreclosure crisis can attest. Even the investment property scenario can sour quickly if you pay too much for the property and cannot secure a high enough rent to cover your expenses.
Buying a home is, like any investment, deserving of thoughtful due diligence. After all, you have to live somewhere, and paying rent is not an investment of any sort. At least those monthly mortgage payments will net you an asset that you will eventually own free and clear. If you plan ahead to pay off your home loan before retirement in order to reduce expenses, your residence becomes an integral part of your long-term retirement plan, as well.
Interestingly, the Gallup poll respondents who were most likely to say that buying real estate was a good long-term investment were those who owned their own homes - proving that home ownership can be - and often is - a great investment.
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