Report finds residential real estate underperforms other assets By Amy Hoak
CHICAGO (MarketWatch) -- Don't count on home equity to come through with a significant portion of retirement funding, cautions a new report by Fidelity Investments.
According to the study, home values underperformed stocks and bonds over every five- and 10-year period from 1963 to 2005. Home values have been slightly above the returns on treasury bills during the same time, according to the report, "The Equity You Live In: The Home as a Retirement Savings and Income Option."
"When we started the work, the real question was: If I have home equity, how should I think about using it in retirement," said Guy L. Patton, executive director of the Fidelity Research Institute. "The conclusion: The returns on residential real estate are probably less than what most people think they are."
Over the more than 40-year period, real compound returns on stocks outpaced that of residential real estate, according to the study, with 5.95% average annual returns on stocks compared with 1.35% in realty. A dollar invested in stocks in 1963 would have compounded to $12.36 by 2006, while the same dollar would have grown to $1.79 in real estate.
The median price of new homes in the United States has risen since the early 1970s, with an average annual appreciation rate of 5.9% since 1963. But there have also been sharp corrections three times during the time period. It's one thing if the homeowner is able to "ride out" the sharp downturns; it's another if they're considering the home as a potential retirement asset in the near future, the report said.
That said, for many Americans in or approaching retirement, home equity is the largest nonpension asset they can draw on for lifelong income, the report said. And there are plenty of Americans who plan to -- and perhaps need to -- tap their home equity in retirement, according to an accompanying survey of more than 1,400 retirees and preretirees.
About one in five of those between the ages of 55 and 75 have used or plan to use equity in their home to help fund retirement, according to the survey. The survey also found that two-fifths of retirees moved after they retired and 15% plan to move. Twenty-three percent of preretirees plan to move, and another 29% are unsure if they will.
Thirty-five percent of preretirees believe their reason for moving will be to access home equity, while only 10% of retirees are motivated by equity. Thirty-one percent of retirees received more than they thought they would when they sold their home and relocated, while 23% earned less than they expected.
Eight percent of retirees who leveraged their home equity used a reverse mortgage to do so, the survey found.
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You are telling us that real estate has gone up by 79% in the last 44 years? At least that is what your $1 in 1963 = $1.79 in 2006 would have us believe. That means that if I bought a house for 20k in 1963 (average price of home back then), it would be worth 36k today.
Perhaps you should think twice before posting random numbers. Fidelity saying that you should not invest in real estate, and should buy stocks (where they have large portions of their business) instead. Gasp! Who would have thunk it.
...Maybe you should learn the difference between real and nominal compounded returns before bashing on someone....
markol0 said:You are telling us that real estate has gone up by 79% in the last 44 years? At least that is what your $1 in 1963 = $1.79 in 2006 would have us believe. That means that if I bought a house for 20k in 1963 (average price of home back then), it would be worth 36k today.
Perhaps you should think twice before posting random numbers. Fidelity saying that you should not invest in real estate, and should buy stocks (where they have large portions of their business) instead. Gasp! Who would have thunk it.
markol0 said:Perhaps you should think twice before posting random numbers.
Perhaps you should read twice before posting random examples. The article clearly states "real compound returns" as opposed to "nominal compound returns".
I would think that the roe would be relevant, not roa because you have a levered return because of the mortgage. I think the article is calculating roa.
I don't think the levered return is close to the tbill rate.
It kind of makes sense that if you wanted to leverage an asset 4 to 1, you would want a stable asset like a tbill. Certainly you wouldn't want to leverage stocks that way. Housing is riskier than t-bills, but stable enough as a long-term investment. There are higher transaction costs, but you get the benefit of shelter.
All in all, I think that Fido is being scummy by comparing the unlevered returns of these two assets. It would probably be optimal to begin your economic life with the leveraged investment in a home and reduce this exposure naturally by paying the debt off, and saving so that wealth grows. As leverage decreases and savings hits a critical mass, then the stocks look more attractive.
Stocks may be a better investment, but it's hard to live in a mutual fund....
Part of the benefit of owning a house is that you get to live in it, and you need a place to live. Thus when you make mortgage payments, you are getting at least some benefit of money that you would otherwise be paying to a landlord. And having a paid-off house when you retire means one fewer expense you have to deal with. It also means you don't have to worry about rent prices going up.
It also ignores the tax advantages of owning a home.
I guess if you plan on selling your house upon retirement, there is some merit to the argument, but for people who plan on living in their home after retirement, I think it's comparing apples to oranges.
I think that the study is vastly misleading because it is evaluating the gains in home prices across the nation without taking into account vastly different real estate trends throughout the U.S. For example, home prices have significantly increased in value in the coastal states, such as California and Florida over the past few decades. This rise in price has also been countered by a consistent loss of value in relationship with inflation of many homes in the Midwest and the heartland. To average both these trends out and say that few homebuyers made any significant gains in real estate investment is a very deceptive interpretation of the statistics. But of course, given that the study cited was done by Fidelity, a mutual fund provider, it is obvious why they would choose to interpret the real estate investment study results in the most unclear method possible - they want you to give them your money, not put it into real estate.
MadAnthony said:Stocks may be a better investment, but it's hard to live in a mutual fund....
Part of the benefit of owning a house is that you get to live in it, and you need a place to live. Thus when you make mortgage payments, you are getting at least some benefit of money that you would otherwise be paying to a landlord. And having a paid-off house when you retire means one fewer expense you have to deal with. It also means you don't have to worry about rent prices going up.
It also ignores the tax advantages of owning a home.
I guess if you plan on selling your house upon retirement, there is some merit to the argument, but for people who plan on living in their home after retirement, I think it's comparing apples to oranges.
Yeah, and MadAnthony only discussed the financial advantages of owning a home.
In addition, you generally end up with a better class of neighbors, and better schools. Not to mention that you can paint the house if you want, relandscape, etc.
I'm going to hate myself in the morning for this...
... but Kiyosaki is right on this one. Very few people will get loans to borrow for stocks ("margin") but many can borrow for a house. This means your principal risk is heightened, but also that your gains are magnified.
a 3% annual nominal increase in your home's value over a 7 year period (average holding time for primary residence) with 10% down effects a 25%+ CAGR on your investment.
Only if people pay in full (no loans) for real estate AND get no material benefit (i.e. they have to live somewhere other than the home they've invested in) would I agree with the article's assertions.
orthros said:I'm going to hate myself in the morning for this...
... but Kiyosaki is right on this one. Very few people will get loans to borrow for stocks ("margin") but many can borrow for a house. This means your principal risk is heightened, but also that your gains are magnified.
a 3% annual nominal increase in your home's value over a 7 year period (average holding time for primary residence) with 10% down effects a 25%+ CAGR on your investment.
Only if people pay in full (no loans) for real estate AND get no material benefit (i.e. they have to live somewhere other than the home they've invested in) would I agree with the article's assertions.
Good explanation of why this 'study' is silly prima facia. Jeez, at the end of the day one simply has to look around and believe what his eyes, ears and wallets are telling him. I'm a perfect example: I've been saving religiously for the past 24 years, maxing IRAs every year, pouring it into the stock market, building a personal reserve, all that stuff. I've saved up a nice little chunk, but *most* of my wealth came not from the stock market but from real estate over the exact same period. Real estate underperforms. Please.
I've read the Fidelity study and accompanying survey a couple times and thought they did a pretty nice job. The focus really isn't equities vs real estate, but whether your home should be relied on as the centerpiece of a retirement savings strategy. I think they make a pretty compelling case that it shouldn't.
The arguments about leverage are very true but can easily work the other way which makes overreliance on realestate as a retirement nestegg especially risky. A good point made in the study is the tendency to "overinvest" in the family home (always bigger, better, more expensive) in aniticpation that values will rise. The cashflow used to "buy big" might otherwise be used to build a more diverse retirement investment portfolio.
cardinalandgoldfan said:I think that the study is vastly misleading because it is evaluating the gains in home prices across the nation without taking into account vastly different real estate trends throughout the U.S. For example, home prices have significantly increased in value in the coastal states, such as California and Florida over the past few decades
Actually, the study spends several pages on this point and presents a 42-year analysis of realestate cyles by quarter and by region:
Looking at housing data on the national level tends to blur much more striking changes on the regional and local levels. One of the most enduring real estate rules of thumb — that “location is everything” — applies with added intensity when home price trends are analyzed by region.
Anyway, I recognize Fidelity's bias but after reading the study, I still thought it was a pretty valuable contribution.
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