Monday, May 2, 2011

Is Housing A Good Investment?

This past Saturday's New York Times carried a story about the investment value of owning a house.

Writing in the column titled Bucks, Times blogger Carl Richards penned a short piece titled "Home, Sweet Investment".

Mr. Richards noted how, despite the housing downturn of the last few years, most people consider their home their "best investment".

And it's true, in some respects: many people who are selling their homes today are receiving prices far in excess of what they paid decades ago.

However, to Richards, that's precisely the point: housing has been a good investment relative to, say, a mutual fund because they have been held for a long period of time:

So when people who lived in the same house for 30 years say their home was their best investment, consider this: It was probably the only investment they actually held for 30 years. For comparison, look at stock mutual funds, which are meant to be held for a long time but often are not. According to the research firm Dalbar, the average investor holds on to a mutual fund for just over three years.

I like the 30 year time horizon since, coincidentally, I have been involved in the investment business for nearly 30 years.

When I started professionally managing money for institutions in early 1982, the Dow was languishing around 1,000, while today the Dow is nearly trading at 13,000. This represents a compound return of nearly 9% per annum - not including dividends.

And all you had to do was hold on.