By:Dennis Norman
Lately,with the exception of mortgage interest rates,most of the news about the housing market is not very pretty. I have seen several articles suggesting it is smarter to rent a home than buy and that buying a home may not be a good investment. Earlier this month I wrote a post suggesting there was more “value”to a home than just monetary gain however this morning I decided to look at home ownership from purely an investment perspective.
Today I just focused on the purchase of a new home versus existing home but will probably do a similar analysis for existing homes soon. I’m not an economist and don’t have a phd but my analysis was based upon the most accurate data I could find,the source of which is all disclosed. For starters
I did a spreadsheet showing the median prices of new homes in 10 year increments starting with 1970,then added 2005,2007 and 2008 to bring the data into the current market. For all years except 2008 I was able to obtain data by region of the country as well,however the overall analysis is based upon the country as a whole. There are no real surprises in the data,the prices increased with time until 2008 when they decreased. This data came from the US Census new home sales report as well as the US Census regional data on new home sales.
The following table shows what the annual percentage increase (or loss) was for new homes based upon the information in the table above:
As the table above shows while new home prices have dropped by 9% in the past year,over time the appreciation in value has been good. New homes have increased in value by over 800% since 1970 and even over 30% from 2000 (a “normal”year prior to the boom) through 2008. If we look at values from 2005,the last full “boom”year,until now,new home prices have only dropped 9%. None of us buy a home with the plan to have it decrease in value,but in the past year value of a variety of assets have dropped substantially so perhaps real estate has not faired so poorly as one may have thought.
Since this post is looking at our homes as purely a financial investment lets compare the above results with the stock market. If we look at the Dow Jones Industrial Average for the same periods as shown below we would see that in the 38 year period since 1970 an investment in a new home and in the stock market have paid off with close to equal results. However,since 2000 new homes have proven to be a much better investment than the stock market…increasing in value by 30% during the period while the Dow Jones Industrial Average lost 21% in value during the same period. In the past year the median sales price of new homes has dropped by 9% however the Dow dropped by over twice as much at 21%.
I think this shows that in spite of all the bad news we keep hearing about the real estate market,houses are,and have been a good investment. In this post I have just focused on the dollars and not the emotion;memories that are made and cherished forever,love that goes into a home,etc. I talked about this in an earlier post that I would invite you to read if you missed,just click here.
Of course if you buy anything at the height of the market whether it be a house,gold,stocks or cars and sell at the bottom of the market you are going to get hurt. Fortunately history has shown,and as I have hopefully illustrated in this post, real estate recovers and prospers in time. Don’t get me wrong,I realize that there are people out there that have lost their jobs,have to move to a different area for work,own a business that is struggling,or a myriad of other issues that may not give them the luxury of waiting for the market to come back. For those people they will find little comfort in the information in this post. If you find yourself struggling to keep up with your house payment I would suggest you check out an earlier post of mine on this topic by clicking here.
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