An interesting story in today's New York Times outlines the largely illusory nature of gains in personal wealth created by rises in housing values. The story makes it clear that the stock market is still by far the best form of investment:
The housing boom of the last five years has made many homeowners feel like very, very smart investors.
As the value of real estate has skyrocketed, owners have become enamored of the wealth their homes are creating, with many concluding that real estate is now a safer and better investment than stocks. It turns out, though, that the last five years - when homes in some hot markets like Manhattan and Las Vegas have outperformed stocks - has been a highly unusual period.
In fact, by a wide margin over time, stock prices have risen more quickly than home values, even on the East and West Coasts, where home values have appreciated most.
When Marti and Ray Jacobs sold the five-bedroom colonial house in Harrington Park, N.J., where they had lived since 1970, they made what looked like a typically impressive profit. They had paid $110,000 to have the house built and sold it in July for $900,000.
But the truth is that much of the gain came from simple price inflation, the same force that has made a gallon of milk more expensive today than it was three decades ago. The Jacobses also invested tens of thousands of dollars in a new master bathroom, with marble floors, a Jacuzzi bathtub and vanity cabinets.
Add it all up, and they ended up making an inflation-adjusted profit of less than 10 percent over the 35 years.
That return does not come close to the gains of the stock market over the same period. The Standard & Poor's 500-stock index has increased almost 200 percent since 1970, even after accounting for inflation.
The article notes that real estate is a good investment, but for the traditional reason: "You can live in the house you own." If you sell your house, you have to buy or rent housing somewhere.
The article doesn't talk about the ubiquitous practice of taking out home equity loans, which is an additional danger in seeing one's home more as an investment than as simply a place where you want to live.