Should You View Your Home as an Investment?

Comparing housing appreciation to stock market returns over the past year

First-time homebuyers accounted for 33% of home sales in August 2020, according to a recent announcement from the National Association of Realtors. That’s up from 31% in August 2019. All of these new homeowners were probably told that their purchase is a great “investment,” but is that actually the case?

In reality, it’s more likely that people consider their home a wealth-building tool, rather than an investment since it allows home buyers to not “throw money away” on rent. But is that the right way to think about it? Should you compare the appreciation of your home to traditional investments like stocks and bonds? 

Assuming you do, think about how the housing market performed over the past year compared to the stock market. The answer to that equation totally depends on where you live and how you are invested too.


Apples to Apples

Before making any comparison between your primary residence and the stock market, we need to make a lot of assumptions. 

Of course, the price of owning a home is more than just a monthly mortgage payment. There are insurance expenses, property taxes and maintenance costs to consider too. But for this analysis, we’ll just consider the appreciation of the asset. 

In terms of stock market performance, there are many metrics to choose from. You can use the S&P 500, the Down Jones Industrial Average or NASDAQ? Each has its pros and cons – the DJIA is too narrow, NASDAQ is too tech-heavy, or the S&P500 is too large-cap. For this analysis, let’s use all three metrics.


Stock Market Performance

One thing to note is that investors cannot invest directly in an index and quoting performance for just one-year is typically considered short-sighted. 

But for our purposes, we’ll do it anyway so that we can make comparisons between U.S. stock market indices and housing prices. 

  • For the 1-year period from September 1, 2019through August 31, 2020, NASDAQ climbed from 7,906 to 11,761 – a gain of 48.8%.
  • For the 1-year period from September 1, 2019 through August 31, 2020, the DJIA climbed from 26,198 to 28,133 – a gain of 7.4%. 
  • For the 1-year period from September 1, 2019 through August 31, 2020, the S&P 500 climbed from 2,909 to 3,508 – a gain of 20.5%. 


Location, Location, Location

The National Association of Realtors reported on Tuesday, September 22nd that August’s national price increases marked 102 straight months of year-over-year gains. Consider these price increases:

  • In the South the median price of $269,200 was a 12.3% increase from a year ago.
  • In the West the median home price of $456,100 was an 11.8% jump from a year ago.
  • In the Midwest the median price of $246,300 was a 10.7% increase from a year ago.
  • In the Northeast the median price of $349,500 was a 10.4% increase from a year ago.


What Does it All Mean?

Each homeowning situation is unique, so it’s difficult to make blanket statements. Home prices have appreciated significantly in the past year and, as the National Association of Realtors reported, the market has seen 102 months of year-over-year gains. 

Homeowning is more like the stock market than it may seem on the surface. Short-term real estate prices can fluctuate wildly just like stock prices. Take 2009 as a warning. That year the great recession caused median home prices to drop by 14%? 

Also, consider that the above real estate prices are just median prices. For example, while it’s true that in the West, the median home price saw an increase of 11.8%. But, that means half were less than 11.8% (less desirable) and half were more than that (more desirable). Obviously, this is not unlike quoting stock market returns – depending on how you are invested, some might experience returns greater (better investments) or less than the market (worse investments).


Past Performance is No Guarantee

Past performance is no guarantee of future results. 

Stock market investors and home-buyers should never forget that fact. 

The increases home-owners witnessed over this past year are remarkable — about triple the average annual price increases that home-owners have witnessed over longer periods of time. The same goes for the three stock market indices over the past year as they are well past their average annual returns too – by a lot.


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