Everyone talks about what a great investing move residential real estate is. Even with the housing market falling, the idea is that residential real estate can be a great idea. However, is it really that great? Fidelity Investments recently finished a study on residential real estate. The verdict? Don’t count on home equity to come through for your investment portfolio. You’d be better off to invest in some realistic commercial real estate, or adjusting your investment portfolio to include better performing investments. MarketWatch reports on the study:
According to the study, home values underperformed stocks and bonds over every five- and 10-year period from 1963 to 2005. Home values have been slightly above the returns on treasury bills during the same time, according to the report, “The Equity You Live In: The Home as a Retirement Savings and Income Option.”
“When we started the work, the real question was: If I have home equity, how should I think about using it in retirement,” said Guy L. Patton, executive director of the Fidelity Research Institute. “The conclusion: The returns on residential real estate are probably less than what most people think they are.”
Over the more than 40-year period, real compound returns on stocks outpaced that of residential real estate, according to the study, with 5.95% average annual returns on stocks compared with 1.35% in realty. A dollar invested in stocks in 1963 would have compounded to $12.36 by 2006, while the same dollar would have grown to $1.79 in real estate.
The median price of new homes in the United States has risen since the early 1970s, with an average annual appreciation rate of 5.9% since 1963. But there have also been sharp corrections three times during the time period. It’s one thing if the homeowner is able to “ride out” the sharp downturns; it’s another if they’re considering the home as a potential retirement asset in the near future, the report said.
So, basically, relying on residential real estate to help you make retirement is probably not the best option. There are other investments that will work much better, including stocks. Indeed, even some cash investments might be better than real estate (and safer). Carefully consider your options before making a residential real estate investment beyond the purchase of your home.