Why Land and Homes Actually Tend to Be Disappointing Investments

New York Times ^ | ROBERT J. SHILLER

[expat_panama]

Buy land: They’re not making it anymore. That often repeated adage sounds like good financial advice.

But over the long run, it hasn’t been. Despite solid price increases over the last few years, land and homes have actually been disappointing investments. It’s worth considering why.

Let’s start by looking at the numbers...

 

 

...Over the century from 1915 to 2015, though, the real value of American farmland (deflated by the Consumer Price Index) increased only 3.1 times, according to the Department of Agriculture. That comes to an average increase of only 1.1 percent a year — and with a growing population, that’s barely enough to keep per capita real land value unchanged.

According to my own data (relying on the S&P/Case-Shiller U.S. National Home Price Index, which I helped create), real home prices rose even more slowly over the same period — a total increase of 1.8 times, which comes to an average of only 0.6 percent a year.

What all that amounts to is that neither farmland nor housing has been a great place to invest money over the long term.

To put this in perspective, note that the real gross domestic product in the United States grew 15.5 times ...

 

 

...When you add all this together, the slow long-term pace of farmland and home price increases is not surprising...   ...it’s far from inconceivable that the real price of land could be even lower than it is right now.

[rjsimmon]

The ownership of real estate is an investment in your nation, state and community. The owner has a vested interest in the success of their property and a desire to see the area around them be successful and not a blight. It provides stability, security and a sense of belonging that only ownership can provide. As Gerald O'Hara told his daughter, Katie Scarlett:

“Do you mean to tell me, Katie Scarlett O’Hara, that Tara, that land, doesn’t mean anything to you? Why, land is the only thing in the world worth workin’ for, worth fightin’ for, worth dyin’ for, because it’s the only thing that lasts.”

[Celtic Conservative]

It could be that the root of His name is schuler which is somewhat analagous to the word “teacher” in english.

CC

[refermech]

A paid off house works for me. Most people I know pay at least 800.00 a month to live in a house like mine. I pay only 200.00 It’s nice, so I save 600.00 a month. Not a bad return on my investment.

[dp0622]

Sending the bill for sewer disasters, worn out central air, washing machines, dryers, dish washers, start off 20k in the hole with closing costs on both sides of tranaction. Water tax. Elecritity. Heat. Lawn Maintenance. Homeowners insurance, the roof needing to be redone...

Of coure if youre staying 40 years, a house is better.

If you’re looking at 10, renting is

[ifinnegan]

Excellent comment, MortMan.

[CurlyDave]

...Over the last 50 years, my investments in real estate have done quite well, thank you NYT.

Same here.

My time line is only 30 years for investments, although it is 45 years for home ownership. I have done far, far better in real estate than in the stock market, even though I have put more money into the stock market.

The real reason for this is that I can safely get an 80% loan on real estate. If it is investment property, someone else makes the payments for me, and that nasty old inflation that they factored out of their calculations works for me. I put 20% down, but inflation increases the price of 100% of the property. Even if values go down temporarily, the loan can not be called if I keep the payments up.

For a lot of reasons, inflation is the government's friend, so we will have it forever. If you are a real estate investor (I mean real tangible property, not REITs) you make inflation your friend also.

When you can align your personal financial interests with the government's interest, you will prosper.

[ifinnegan]

That’s what I thought. Propaganda.

And you hit on why.

“The elites want us all to live in tiny apartments”

This completely true.

[grania]

I agree that a paid off house in a nice area to live in is the best. I do think, though, that if I ever moved again, at my age I would not purchase another. I'm not confident enough in the future to not have the money aside, if for chaos issues or weather (etc), it became necessary to move.

How do you do it for $200 a month? My property tax, homeowners insurance and utilities even cutting corners would be about $6000 a year. And then I have to factor in repairs and improvements averaging at least $2000 a year.

[ripnbang]

I knew someone would post that....you did not disappoint! :)

[CaptainAmiigaf]

You are the smartest one here.
No house, you rent for 30 years and accumulate 360 cancelled checks. You have paid the owner’s taxes, upkeep, insurance, and sundries.
You buy a house and after 30 years (!) you have 360 cancelled checks good for toasting marshmallows PLUS the ownership of that house which has been a family’s home for that 30 years. It is yours.
Rent or buy, you have lived, eaten, played, had children, vacationed and worked hard.
RENT: 360 checks cancelled
BUY: Property worth (especially now) one hell of lot of money, even after taxes. ALSO, when sold, the money from the house can earn YOU interest.

[CIB-173RDABN]

I remember a few years ago there was a trail balloon floated with the idea that people like us should pay “income” taxes on the money we were NOT paying for rent. Thankfully, it did not go anywhere.

[expat_panama]

Happy Monday morning all!  Stock indexes closed last week off in lower volume and even metals saw some profit taking (gold, silver @ $1,327.49, $19.86).  This morning our futures heat map has virtually all prices across the board falling -0.52% but w/ stocks -0.12%, metals -0.17%, and energies the big hope @ +0.44%.

Today: NAHB Housing Market Index and Net Long-Term TIC Flows.

The buzz:

Global stocks rise on SoftBank bid for ARM, dollar up vs yen after Turkey ...

Reuters - 11:21am

LONDON The dollar strengthened against the yen on Monday and oil prices rose as investors unwound safety trades after the failed coup in Turkey while SoftBank Group's $32 billion deal to buy British chip designer ARM Holdings lifted European equities.

Asian Stocks Unfazed by Failed Turkish Coup

Wall Street Journal - 9 hours ago

Stocks in Asia were mixed on Monday, showing little reaction to a failed coup in Turkey, although investors responded to data out of China suggesting that the country's housing market was expanding at less frenetic pace.

Retail Sales Better Than Expected

Alan Bush - ADM Investor Services - Fri Jul 15, 8:40AM CDT

Prices are higher after the release of the stronger than expected retail sales report in conjunction with the bullish influence of higher crude oil prices (full story)

Eco News Moves Markets

Nick Mastrandrea - Market Tea Leaves - Fri Jul 15, 2:44AM CDT

Yesterday the markets moved higher based on eco news. Today we have a virtual tsunami of economic reports, what will the markets do? Read on to learn more... (full story)

[sphinx]

The elites want us all to live in tiny apartments, and accept a far lower standard of living.

It is true that "the elites" are hostile to urban sprawl and automobile-centric planning, and that they favor much denser patterns of urban life. But it is also true that very large cities have passed the point of diminishing returns on far-flung suburbs and brutal commutes. In these areas, the market is increasingly driving gentrification and densification even without the heavy hand of liberal social engineers. The challenge is the recovery, restoration or retrofitting of humanely scaled urban neighborhoods in places that have long been automobile dominated, but in which residents are now rebelling against spending too many of their non-work, waking hours behind the wheel.

The reasonably close-in automobile suburb with a moderate commute is a fine way to live, until it is overtaken by scale. Looking forward, the biggest planning challenge probably falls to the mid-size cities that have not yet hit the commuting wall, and in which road construction still seems like a viable option. These cities need to look around them, and at the colossal transportation mess in places like New York, Philly, DC, Chicago, Atlanta, and anywhere in California. The question is how to avoid a similar fate over the next 50 years, as the U.S. population doubles again and a couple of dozen of today's "mid-majors" come to rival today's Chicago or Atlanta in size.

[expat_panama]

100 acres somewhere that has natural beauty and or that I can grow food on.

My capital's creating wealth in stocks.

That said, even as we speak (type?) I just now started a crew clearing a couple more acres for food crops.  It's not a serious investment for me tho I may break even eventually w/ the harvest and there may even be a good enough increase in the land value, but having the food supply will at least be insurance for peace of mind...

[mountainlion]

somewhat analagous to the word “teacher” in english.

I was thinking shill especially after I looked at the graph under the clip.

[tje]

Some truth to that - first house I bought I lived in for 18 months and made $14K off of - I did no work on that house. Profit was due to market changes.

Second house was a wash - I only painted that house (in and out) - Jimmy Carter was president so it was hard to move. Lived there about 5 years.

3rd house - a fixer up, paid 33K - sunk about 50k into it and sold for $130k - lived there 11 years.

Current house - I paid $175k for and I put it around $250k now based on what the neighborhood houses are selling for. (I’ve been here 15 years) I have 2800sq ft, a pool and pay less than $550/month payment - my son pays $1100/month for an 800sq ft apartment.

I do have taxes, but there’s no way I could rent a place equivalent to what I live in for what I pay.

[pieceofthepuzzle]

Absolutely understand. Plus, there’s just something fundamental about being able to grow a crop, and watch it mature and produce.

[Don Hernando de Las Casas]

You left out the $120,000!!!!!! cold hard cash down payment on my last home, the property taxes not paid by renters, the repairs and upkeep not paid by renters.

Putting that 120K in stocks has historically outpaced home/land investments.

Somebody pointed out that stocks MUST outperform homes, or NOBODY WOULD EVER BUY STOCKS, NOT EVER. Who would buy a piece of paper over an incredibly functional asset like a home, if the piece of paper did not outperform the home?

[Mouton]

That was floated under the Clintoon administrative. It is called imputed income.

I used to follow the advice of Bob Brinker. His advice about a house: one should look at their home as not an investment but as a residence. Other advice he used to give was to not base investment decisions upon tax outcomes, they are either a good or bad investment on their own.

Following his advice, I have done fairly well over the years.

[Crucial]

When you propagate section 8, welfare and unchecked immigration, home values are bound to suffer.