Housing Complex

D.C. Housing: Not As Good an Investment As It May Seem

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How often, in the past year or two, have you heard Washingtonians wish aloud that they'd bought a house back when they were cheap, around 2008 or 2009—or that they'd had the means to buy one? With the median single-family home in D.C. selling for $573,000 in April according to the Office of the Chief Financial Officer—and the average sale, pulled up by high-end properties, topping $749,000—homes are now out of reach for many District residents, and a top investment choice for the wistful time-travel set.

But how good an investment have home purchases really been in the past five years? Capital Market Appraisal crunched the numbers using data for the D.C. metro area from the S&P/Case-Shiller Washington, DC Home Price Index. The results are somewhat surprising.

case

Buying a home in the D.C. area in 2009 certainly wouldn't have been a bad investment—on average, it netted buyers a 16.23 percent rate of return through 2013. But it's also far from the best investment: Putting that money into the stock market would have provided a much higher return of 106 percent.

In fact, the return on a housing investment wasn't all that much higher than the rate of inflation, which was just more than 10 percent. And over the 10-year period from 2004 through 2013, when the housing market rose and dived and rose again, housing was actually, on average, a negative investment relative to inflation. (According to Zillow, D.C.-area home prices won't reach their pre-crash peak again until 2021.)

As always, there are a few caveats. First, these numbers measure the housing market in the D.C. area, which stretches are far as Jefferson County, W.Va.; in D.C. proper, the returns would likely be higher, given the city's recent population surge and cachet boost. Second, many families don't have the option of putting hundreds of thousands of dollars into the stock market, since they don't have hundreds of thousands of dollars sitting around. For these families, taking out a low-interest mortgage and investing that money in real estate might actually have been the best large-scale investment available. Finally, while mortgages require hefty interest payments, these are tax-deductible, and homeownership does allow a household to get by without paying rent.

But Americans do tend to overstate the extent to which housing is a good investment, and Nobel Prize–winning economist (and Case-Shiller eponym) Robert Shiller warns of the pitfalls of dumping your savings into a home. Even at a time when housing has seemed like such an obviously good investment in the District, there are reasons to be cautious.

Photo by Lydia DePillis; chart from Capital Market Appraisal

  • DC

    Comparing the investment to stocks and using that time frame is crazy misleading. If you scooch that window early by a year (ie before the market crash) the stock returns plummet.

    The simple fact is this, when viewing long term, stocks generally return about 6-8 percent a year and real estate returns about whatever the inflation rate is. So, yes it is better to invest your spare cash in stocks, not real estate, but the difference isn't that great.

  • Ben

    Well yes, if you could time the stock market perfectly and invest only starting in 2009 and then pull out returns in 2013, then you could have made 106%. But you can't time the market like that, so you have to look at the returns over a much longer period, because that is the real return your average investor will get. Which historically is much lower at 8%.

    This doesn't mean stocks or housing are better or worse as investments. People generally don't think clearly about either as an investment. Your house is not an investment if you live in it unfortunately, because you aren't buying it for the purpose of a financial return. You're buying it to live in it. And if you add in insurance and yearly maintenance, the returns go even lower. Housing can be an investment in the sense that you may end up paying less per month than a comparable rental, and over time your housing cost will stay more stable and not rise as quickly as rents, especially in the DC area.

  • Um

    While I appreciate the attempt to look critically at the housing market, this article is ridiculous. The caveats are so critical and huge that they completely negate the conclusion. It's like publishing a survey with a 150% margin of error.

  • Jim Ed

    "As always, there are a few caveats. First, these numbers measure the housing market in the D.C. area, which stretches are far as Jefferson County, W.Va"

    Nice misleading headline. No shit that you're not going to see a return if you bought a home in Haymarket or Stafford - the exurbs are are stagnating, and its where a huge proportion of home owners live. If you've bought in the District proper, you've almost certainly seen a tremendous uptick in equity. No one is wistful about not buying that 25 year old townhome in Germantown in 2009.

    Stop conflating the DC Area and the city proper when its convenient to invent a narrative.

  • 20011

    Real estate as an investment is horrible. As a place to live? Different story.

  • ileana

    The analysis/comparison in this article is so flawed that I'm surprised no editor caught it.
    -It doesn't mention the tax deduction from mortgages
    -It doesn't count for alternative living arrangements. Say, the person that invested in stocks rented a similar property or lived with his parents?
    Please, analyze, edit and re write your conclusions.

  • 20011

    The tax deduction from mortgages borders on irrelevant.

  • JC

    The article also doesn't factor in leverage. You can buy a $625,000 house with 96.5% LTV and one of the DC homebuyer programs paying the other 3.5%. I don't know of any margin account with that kind of leverage.

    16.23% return on $625k with $22k actually invested is significantly better than 106% return on the same $22k (it equates to a 361% return minus investment expenses)

    20011, the tax deduction is not irrelevant in DC where the high local income taxes largely push you over the standard deduction threshold.

  • 20011

    The gov't needs to get out of the business of subsidizing mortgages. If you can't afford to put a proper down payment on a home, then you don't deserve to own it.

    No one is entitled to own.

  • mark

    JC is right. The actual return should factor in sunk costs (downpayment, money otherwise spent on rent, etc) not total appreciation of two assets.
    Also, keep in mind that you pay significant tax when it comes time to sell stocks. Not so for the first $500,000 in gain when selling real estate.
    Factoring in all of the economics, real estate has a distinct edge.

  • Petworthian

    @JC

    Spot on. The leverage aspect changes the math by a huge factor.

  • Frank

    This article is stupid on so, so many levels. First, it it picks the absolute low point of stocks (2009) and counts the return up until now. Housing is a good investment precisely because it didn't crash like stocks did. Second, it ignores the obvious fact that part of the "return" on housing is actually living there -- not just appreciation. It ignores leverage. It ignores tax issues (not just deduction but sale).

    I think the WCP is run by drunk, unqualified interns for publish this crap. It literally is the worst researched nonsensical article imaginable.

  • M. Shapiro

    Oh Frank is so smart, NOT! Look I'm not advocating for the article or opining one way or the other as to whether the headline and analysis is misleading in relation to the data presented but lets address Franks comments.

    The article doesn’t ignore leverage Frank, it removes it as a variable so that the assets are being compared on an equal relative basis. Gee ever heard of a margin account, that would certainly change the reported returns on the S&P. Or how about the repo market, yes bonds can be leveraged too. That’s the point, these are all unleveraged reported returns. (It’s like comparing the enterprise value of a company to unleveraged real estate vs. comparing a leveraged buyout to an FHA mortgaged home...see?)

    Second, this is an asset class comparison, so no Frank part of the ‘return’ is not the utility of living in the home. The right way to look at this is to pretend Frank that you have the type of money where you can purchase an investment property (not your primary residence) with cash, because yes wealthy people do just that, and compare that to owning a corporate bond index (unleveraged) or the S&P (the unleveraged index w/no dividends) over a similar time horizon.

    The comparisons aren’t perfect and the data is backward looking but the relative return comparison over the stated time period is what it is. As an investor, timing is everything and learning how to rotate out of asset classes as the cycles turn is the name of the game.

    Don’t be surprised if that bar graph looks very different over the next five years...think stock market crash coupled with severe dollar inflation.

  • NotaRenter

    So if owning a house was such a bad idea, can a renter tell me how much of a return they got on the money they spent on renting?

    I will be the first to admit that housing isn't the worlds best investment, but for most people it is an investment that provides a stable cost for a roof over yoru head, a tax benefit, AND then when you sell, appreciation.

    Renting does none of these things, and advocating people spend the money they would have spent on a house, on stocks is about the most irresponsible advice I've ever seen.

  • JDS32

    @NotaRenter

    Except that after 5 years or so when your monthly payments start paying down more of the principle rather than pure interest, the tax advantage disappears, never to return.

    And don't bet on appreciation. Though flawed, the article is spot on in regards to the increase (or lack thereof) of home values. This is a well-studied phenomenon - feel free to read some of Robert Schiller's work on this subject area.

    I might not build equity in my rented apartment, but I don't pay HOAs, property taxes, repairs when things break, or maintenance. I've also kept my would-be down payment invested and have realized fantastic returns - returns that I wouldn't realize if I had an illiquid house.

    To each their own, I suppose, but it isn't nearly as cut and dry as you make it out to be.

  • Northwesterneer

    20011- for a city teeming with people with Economics degrees, you have no idea about how economic calculations work at all.

  • Northwesterneer

    M. Shapiro:
    "Second, this is an asset class comparison, so no Frank part of the ‘return’ is not the utility of living in the home. The right way to look at this is to pretend Frank that you have the type of money where you can purchase an investment property (not your primary residence) with cash, because yes wealthy people do just that, and compare that to owning a corporate bond index (unleveraged) or the S&P (the unleveraged index w/no dividends) over a similar time horizon."

    No, this is completely wrong. Asset class comparison is incorrect in this case- one has to calculate the cost of alternative housing, the mortgage deduction, and similar, otherwise the calculation is incorrectly weighted in the other direction.

    This article is bad economics.

  • Transplant

    I'm curious where the 10% inflation rate number comes from? This certainly not from CPI.

  • Vinnie

    Ummm...about as good a way to lie with numbers as possible.

    You're comparing annual rate of return for house price appreciation vs. aggregate growth (perhaps even compounded aggregate growth) in stocks & bonds and aggregate inflation.

    TO NOT LIE: either look at aggregate growth of housing or annualize the other figures.

  • Fast Eddie

    Vinnie, what makes you think this article is comparing annual rates of return for house price appreciation?

    A. it doesn't say that anywhere

    B. an 11.69% annual rate of return for ten years is a 202% cumulative return, which would mean house prices tripled since 2004.

    Now does that sound right to you?

  • sara-dc

    The title of this article is totally misleading. Sure some parts OUTSIDE of the DC area no one wants buy or to move to as the commute is hellish into DC. But DC properties inside DC not a wise investment???--explain to me why there's such a shortage of houses on the market in DC? or if they are being sold, the hot properties aren't sitting for wks. As long as one doesn't buy way too high (bubble time); and w/the stock market unpredictable, having a roof over one's head and being able to rent it out or sell it later are all reasons to invest in real estate.

  • Alan

    JDS32,

    Try actually answering the question posed to renters, i.e. what financial advantage did you get out of renting?

    The answer is none.

    In fact, rent tends to go up every year while the monthly note on a house (non-ARM) tends to go down every year (presuming you pay it off on time).

    There's no way on Earth someone renting over the course of 30 years and buying a home over the course of 30 years, in DC, is not going to come out ahead, especially starting in 2009 like this article proposes.

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