Although fewer Americans are purchasing homes, we believe they should. Real estate has reached a new high in the opinion of those who believe it is better than stocks, bonds, or gold as an investment.
According to a Bankrate.com poll, nearly one-third believe that real estate is a better option to invest long-term money. This is more common among younger people, 37% of those aged 23-28 putting real estate ahead of stocks, bonds and gold, while 28% placed savings accounts last. Greg McBride (chief financial analyst at Bankrate) said that this is the strongest real estate sentiment in seven years of the survey.
Unfortunately, real estate is not a better investment than it was in the past century. Stock market returns are almost always the best for those with some money.
According to the S&P/Case-Shiller Home Price Index, average home prices increased only 13% between 2006 and 2019, the peak of the previous housing bubble. The S&P 500 grew 125% during the same period. Stocks performed 10 times better that real estate.
McBride, Bankrate’s economist, said that despite the stock market’s higher returns, it “remains rather unloved.” “We’ve been conducting this survey for seven year and have been in a bullish market for seven years. But investors haven’t really warmed up to it. Only 1 in 5 people believe that the stock market makes the best long-term investments.
A house is more complicated than a stock portfolio. A property is expensive to purchase, sell, and maintain. It can also lose its value over time like an iPhone or car. A house can be considered an investment. Instead of receiving a quarterly dividend, you will need to invest money in it regularly to keep it in great shape.
However, when it comes to real property, comfort breeds contentment. Although less than half of Americans have stocks, almost two-thirds own their home. Many Americans, if not all, are aware that they can become homeowners through their family, friends and neighbors. A house is a tangible asset, just like financial instruments. You can touch, kick, and look at it. It is yours. It gives us a feeling of comfort that we don’t get with stocks or bonds,” stated Anders Skagerberg, a financial advisor at Skag Financial Salt Lake City, Utah.
Tyler Reeves, founder and CEO of Plimsoll Financial Planning, Birmingham, Alabama, stated that the way most people view home sales leaves out many costs. This artificially increases real estate’s perceived rate-of-return.
“You discover that this house was purchased for $300,000. It was then sold five years later for $400,000 – wow! That’s only $100,000! He said. They don’t realize that during the five-year period they had to purchase a new HVAC unit and hot water heater and pay a five-year mortgage.
Maintenance and repairs are often overlooked in homeownership, particularly for younger homeowners. According to Zillow, maintenance alone, which includes tasks like cleaning the gutters, yard work and carpet cleaning, can cost $3,000 per year.
Unexpected repairs can result in much higher costs. In Business Insider, she reported that a young homeowner in Tennessee spent $21,000 to repair her 1950s ranch house. Although she acknowledged that procrastination was a factor in some problems, many repairs were inevitable due to normal wear and tear: replacement of roofs, ceilings being repaired and upgrades to electrical systems.
Even with the best case scenario, property comes with costs. These include taxes, homeowner’s insurance, mortgage payments, taxes, and fees like trash pickup. There may also be a homeowners’ association or condo association. These taxes and fees are the reason first-time homebuyers are advised to budget 30% above their monthly mortgage payment in order to realize the true cost of owning their home.
A house flipper who has good credit could purchase the $300,000.00 house in Reeves’ example today for $70,000 (down payment plus closing cost) and $1,130 per month. The lucky debtor will have paid $45,000 just in interest payments and, under the 30% rule, about $20,000 in taxes and other expenses over five years. After accounting for all the fees of agents and interest, taxes, and maintenance she paid along the way, the house would be sold for $400,000 and she would make a profit $22,000.
The flipper received a 31% return on her initial investment in the best case scenario. Instead, she could have made $34,000 in profits if she had invested $70,000 five years ago in a stock-market index funds.
Adam Van Wie, a Jacksonville financial planner, said that there are many clients who have lost money or broken even in real estate. He spoke to CBS MoneyWatch. “We try to talk them out, but they don’t listen,” Van Wie said.
The housing crisis continues to make it difficult for people to make quick profits in the housing market. Financial planners have seen an increase in people seeking financial advice to help them realize their dreams of real estate wealth.
Reeves stated, “In the past couple years it’s come up with almost half my clients.” It was unimaginable that it would have happened seven, eight years ago.
Like most financial planners Reeves stressed that he would not discourage anyone from investing in real estate. It’s a lot more like a job than people think. To make it a profitable endeavor, you have to treat it as such.
Tara Unverzagt founder of South Bay Financial Partners, Torrance, California, said, “I know people who earn money selling, buying, and renting real property, just as I do buying and selling stocks or bonds.” But that’s their way of life. They spend a lot time studying the cycle and knowing when to ‘buy low, sell high.’ ”
She said that real estate is similar to stocks in that the average person buys high and sells low, and then loses their shirt.
