So read the title of a recent USA Today story which caught my attention as once believed to be the pinnacle of the American Dream, has instead lead to the American nightmare. As written in a past post, even the funding structure (30 Year Mortgages) of this institution was built upon the idea of life time employment as in the infamous “30 years and out saying”. Also aside from the “dream”, it was a financing mechanism for the golden years however this story shares a different picture.
As the article cites Jack Francis who was a former Feral Reserve Economist who did a look back at comparing stocks and housing as a heads up investment by taking data from1978 to 2008 (thirty years). Here he found, the S&P 500 had returned an average of 11% a year, while the more speculative U.S. small-cap stocks as an index produced an average return a little more the S&P of roughly 13%. However when Francis looked at the return rate for Single-family homes, he found they posted less than a 6% gain. Now yes these are all averages and even a rookie investor in real estate knows, location, location, location is the key so not all property is close to being equal.
On the other foot that is one of the issues of looking at your primary residence as an investment as for most it is purchased on a location basis optimized for personal accommodations to things such as friends, family and work and not for best return. Also the 30 year model was built when urban sprawl was much slower, however the pace at which a neighborhood can fall in or out of favor now runs at a much faster pace as large blocks of jobs depart, the change can be over night.
The other aspect to the story which was interesting is again Francis’s work showed that the home owner was exposing themselves to more “downward” risk then “upward”. In short when one invest in stocks, its known that there will be days when the value goes down, then on the other side of the coin, there will also be those where it goes up. The goal is to have more up days then down as it is then said to have better “up side risk”. Why look at this you ask, the answer is simple as if I were to call upon you selling a stock and shared that there was a 70% chance of losing and only a 30% one of winning would you still buy?
Now one of the things you may be saying is hey wait a minute, I get to live in the thing too so there is value there which isn’t being accounted for. Well not really as to keep a house working and as an investment stable in value, one has to continually invest in re-modeling as over the course of 30 years it will require at least two if not three major remodels to maintain its functionality and resale value. It should be noted this is especially true in the new real estate world as in the past property would be accepted in a rundown condition in exchange for its location which is not so much the case any longer as the winds of supply and demand have shifted to the south. So in short, be prepared to invest in updating where you might not of before, as this will be the cost of living there because location will not carry the fact of disrepair any longer.
As a final thought, believe it appropriate to quote Jack Francis verbatim as he shares this next concept so well in addition to it being an important one:
“I keep telling them this is not the time to buy,” he says. “Some people think the subprime mortgage crisis is over, but it’s not. There are going to be more bankruptcies this year than last so home prices are going to keep falling, and if they buy now they’re going to be under water on their loan in a year or two. It’s a simple matter of supply and demand.”…