Is a home a lousy investment?

Vote at the end of my blog.

The headline on the Wall Street Journal op-ed piece left little doubt on the author’s take on the investment appeal of a house: A Home is a Lousy Investment.

The Opinion-page article by Robert Bridges, a professor of clinical finance and business economics at the University of Southern California’s Marshall School of Business, said that investing in the stock market, hands down beats buying and owning a home based on historic returns.

He notes that a dollar used to purchase a median-priced, single-family home in California in 1980 would have grown to $5.63 in 2007, and to $2.98 in 2010. “The same dollar invested in the Dow Jones Indusrial Index would have been worth $14.41 in 2007, and $11.49 in 2010, Bridges wrote. He also calculated that if in 1980, instead of putting $19,910 toward a downpayment and instead put it in the Down Jones Industrial Index, the value of the portfolio in 2010 would be worth $1.5 million more than the house. In 2007, the stock portfolio would have been worth almost $2.2 million, exceeding the house value by $1.6 million. Earlier, the most recent Case-Shiller report said the typical home in the Denver metropolitan statistical area rose by 22.3 percent from January 2000 until April 2011. That is below the inflation rate of about 31 percent during that time period.

Bridges cautions future generations as viewing home ownership as the cornerstone of personal finances “Young people planning for retirement increasingly face a choice between house payments and contributions to retirement accounts. They simply can’t afford both,” he writes. He concludes that while “while houses are possessions and part of a good life, they are not always good investments on the road to financial independence.”

Mike Rinner of the Genesis Group, read the WSJ article this morning.

Investment aspect shouldn’t drive home buying

“It contains a germ of truth,” Rinner said. But he indicated that Professor Bridges focused on too much on buying a house as an investment, as opposed as a place that meets other personal, societal and familial needs.

“If you are buying a home just as investment, you are making the same mistake of people who were buying homes a few years ago in California and other places of the idea of buying a home and flipping it the next day for a huge profit,” Rinner said. “You should be buying a home because it is a good place to raise your kids, it’s convenient to where you work, and other lifestyle reasons. You should not be spending money on a house because of it’s so-called “investment value.” You should buy a home that fits your needs and you can afford. If you buy a home for the right reasons, and it shows any appreciation, it then a very good investment.”

He also said that the professor did not seem to factor in the imputed cost of renting, when looking at the financial advantages and disadvantages of home ownership, as compared to stocks.

“You have to live some where,” Rinner said. “Also, you have to consider that rental rates have been rising, and probably will continue to do so for the foreseeable future. Money you put in the stock market over time may go up more than the value of a house. But you can’t live in half of the stock and consider the other half your investment.”

And that is true, he notes, no matter how much the value of a stock rises more than the value of a house.