So is Buying a House Really an Investment? (Part One)

Have you ever read an article or book written by someone you knew to be smart, an expert in his field, and found that it didn’t make sense?  I don’t mean that the material was too complex but rather that the line of reasoning seemed somehow faulty or didn’t flow logically or was missing some major point.  You began to question yourself, think that you perhaps misread it.  After all, the author is an expert.  So you re-read it, once, twice, and you finally came to the conclusion the author is wrong.  His argument really was faulty.

 

I had that experience a few weeks ago when I picked up a copy of USA Today in a hotel lobby and read a feature column by Ken Fisher, chairman of Fisher Investments (and author of 11 books), titled “Why Buying a Home is a Lousy Investment”.

 

The title itself went against my personal belief about the value of owning a home, but I had an open mind and was willing to consider his arguments.  But by article’s end I was only confused and far from convinced.  I put the paper aside and came back to it a few days later.  I read Fisher’s column again.  Same reaction, except maybe I became even more entrenched in my own original opinion of home-owning.

 

Finally, I picked it up again this week and then point by point considered Fisher’s argument and made my final decision: He’s just flat wrong.

 

I will only summarize his argument in this post.  You can read his original article at https://www.usatoday.com/story/money/columnist/2018/02/18/why-your-home-lousy-investment-when-you-think-its-great/340516002/

 

Fisher took as an example a median-priced home ($305,083) in a northern California county in 1995, with a 20% down payment and the balance mortgaged at the going rate of 7.5%.  The owner paid for ten years then sold the house for $763,100, the median price in that same county in 2005.  He estimated taxes and upkeep expenses, calculated interest charges and resulting equity, and concluded that the annualized return was a measly 3.1%.  He compared that unfavorably to investing in stocks, which over the same ten-year span yielded about 11% annually. 

 

(Fisher later issued a correction, acknowledging he miscalculated some expenses of home ownership like interest charges, leading to a very different number: 10.8% annualized return—a number that really is about par with the historic annualized return of the U.S. stock market.  Nevertheless, he doubled down on his argument against home ownership as an investment though he did allow that it had benefits beyond investment value.  He apparently got an earful from unhappy readers.)

 

Here is how I think he came to the wrong conclusion.

 

1. Fisher cited an expensive and atypical California market as his example.  The national median sales price for a home in 2005 was $228,300, or about half a million bucks lower than his theoretical average house in California.  It might be argued that the difference would be proportional in the calculations and his percentages would still be accurate, whatever real estate market is being evaluated; but that is not a given.  Real estate, like politics, is local.  Moreover, his example assumes someone buying, selling, and moving in the same county.  That is often not the case in real life.  In the small town/rural county where I live (with lower prices and even lower property taxes) we have many transplants from high tax areas like New York.  Selling an expensive home and moving to a cheaper area magnifies the gains of home ownership.  Of course, moving from a lower to a higher cost area can be financially difficult but not necessarily a losing investment.

 

2. He used California’s high tax rate to calculate property taxes.  The rate he used was double my own local tax rate.  That higher figure erodes his calculated annual return for the homeowner.

 

3. Fisher calculated interest paid using a mortgage interest rate of 7.5%.  That is double today’s average rates.  Using a figure from 20 years ago is fine for his example, set in 1995; but it is incorrect to apply that number to today’s market to calculate an estimated annual return.

 

4. Realtor’s commissions were figured at 5%.  Buyers may sometimes hire an agent, but usually it is the seller.  My wife and I have sold four homes and only paid a commission twice, and never as high as 5%.  Negotiating a lower rate or using for-sale-by-owner options like Zillow can drastically cut this expense and increase investment return.

 

But it was Fisher’s conclusion about a home’s annualized investment return—whether his original 3.1% figure or his revised 10.8%--and comparison of that to stock market returns that especially irked me.  And I’ll address that next week.

 

Until then,

Roger

“Without the help of the Lord it is useless to build a home or to guard a city.”  Psalm 127:1, CEV