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The Investment Returns of Homes vs. Stocks

Your home is your best investment, right?

A few recent analyses suggest that this old chestnut may not apply any more—if it ever did. Researchers from the San Francisco Fed have recently concluded that from 1870 through 2015, worldwide returns on homes—that is, the average yearly home appreciation across all houses in the world—was 6.9% after inflation. The comparable yearly return for global stocks was 6.7%. Closer to home (so to speak), U.S. stocks returned 8.5% a year over that time period, vs. 6.1% for houses. In America, houses appreciated a little less robustly than homes abroad, and stocks were much better investments than global ones.

Of course, it’s hard to know what to make of this data, considering that the global numbers presumably include huts in rural India as well as palatial estates on the Riviera and everything in between. In addition, there are significant costs to maintaining (and, often, improving) homes that aren’t applicable to a buy-and-hold stock portfolio. On the other end of the argument, homes provide you with a place to live, which is not currently a feature of blue chip stocks.

And there is evidence that home ownership today may not be the return-generator it once was. If you look at the chart, which begins in 2000 through roughly yesterday, you see that the first part of the century offered great returns, on average, to people who owned their homes—who then discovered that they were in the midst of a housing bubble that exploded sometime after 2007. The returns since have been roughly zero by three different measures, though home prices have recovered nicely since the bottom. Nevertheless, over that same time period, stocks have been the better investment.

What’s the point here? Many people seem to think that, over time, their homes will always go up in value, generally faster than stocks. The recent housing bubble may have shaken that confidence, but the recovery might have lent it credence all over again. The long-term data suggests that stock returns have been at least as robust as returns on housing, without all the upkeep and maintenance to worry about. Look at your home as a source of shelter, of comfort, perhaps of status, and an investment only secondarily.

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