One popular housing mantra that almost everyone is familiar with is “location, location, location.” This quote, often attributed to a British real estate tycoon named Lord Harold Samuel, has been used to express the notion that there is only one thing that is important when investing in real estate, and that is location. This common phrase has persisted over the years and is still widely used by real estate agents today when helping potential homeowners find the right home. The whole notion, however, might be based on the faulty premise that buying a house is a good investment.
Let us start with a look at current housing investment returns. The S&P CoreLogic Case-Shiller National Home Price Index increased to 6.2 percent in September, beating many estimates and the previous month’s 5.9 percent. In the 20-city index, home prices increased in all cities for September and posted an annual gain of 6.2 percent. As home equity is the largest asset for most Americans, far outpacing average investable assets for most people, the 6.2 percent annual return should be welcome news. The higher than expected home price increases have been boosted by low unemployment, low home inventory, and historically low interest rates. Compared to the stock market, however, housing is providing substantially lower returns. Both the S&P and the DOW have provided annual returns in 2017 of over 18 percent.
While the stock market might represent a better short term return, most people would list their home as a safer asset than market investments. Most investors recognize that the stock market is volatile and can be risky. Returns for market investments need to be higher than safer assets due in part to their higher volatility and risk. So, if the home is a safe asset, it might still be a good investment. Unfortunately, the home is also not a safe investment.
While the overall housing market might be safer and less volatile than market investments, an individual home is far riskier than the overall housing market. Individual homeownership has some serious drawbacks, like location risk and illiquidity. A single home is not very liquid, as it can take months to sell. Additionally, the old mantra “location, location, location” also poses a risk to homeownership. If you live in an area with one major employer and that employer goes out of business, it could decimate your home price. In a…