Another SmartMoney article, this time explaining why renting is better than buying because stocks are better investments than real estate.
Shares of businesses return 7% a year over long time periods. I'm subtracting for inflation, gradual price increases for everything from a can of beer to an ear exam. (After-inflation or "real" returns are the only ones that matter. The point of increasing wealth is to increase buying power, not numbers on an account statement.) Shares have been remarkably consistent over the past two centuries in their 7% real returns. In Jeremy Siegel's book, "Stocks for the Long Term," he finds that real returns averaged 7.0% over nearly seven decades ending 1870, then 6.6% through 1925 and then 6.9% through 2004.The average real return for houses over long time periods might surprise you. It's zero.
There are a few factors that Jack Hough under-weights in my opinion (being a homeowner) such as the value of diversification. (Of course, one could buy shares of a real estate holding company instead of an actual house....) Still, I essentially agree with him, which is why I'm not eager to buy investment rental property. However, I'm not going to sell my house and rent an apartment; I enjoy the lifestyle of living in a house and the security of owning my own property, and those are worth something to me.
One of the biggest foolish things he's done is to assume that a house is a house is a house when every real estate maven always raves on about "location, location, location". The popular spots aren't going to sprout more housing and one can work to increase demand, and therefore prices. Increased immigration also increases the demand for housing which raises house prices, and rents. So a self-interested renter is an immigration restrictionist, is suspicious of gentrification, and would like a secure job in a real estate market that is losing population.
But who wants to live like that?
The original author gives it away on page 2 when he remarks that his analysis is absent any increased demand. But demand is not static.
TML: Hey, nice of you to drop by. I agree with your assessment... I wonder if his stats depend on new, cheaper housing continually being built to pull down the average? I'm pretty confident that there are certain areas of the country that have experienced much faster and more constant growth than others.