Is Your Home Your Primary Retirement Asset? If So, You May Be In Trouble Study Says
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A new study by the firm Fidelity Investments seems to warn off homeowners from counting on home equity as a primary vehicle for their retirement. Now, I am a firm believer in spreading out ones assets between many sources planning for retirement, but this reports doom and gloom may have to be taken with a bit of salt.
Fidelity Investments is not a player in the real estate market, but a huge player in the stocks and bonds world. So while their advice may carry some water, I would not sell my home tomorrow if I was thinking solely of my retirement. Housing assets are just one plank of a successful retirement strategy.
“When we started the work, the real question was: If I have home equity, how should I think about using it in retirement,” said Guy L. Patton, executive director of the Fidelity Research Institute. “The conclusion: The returns on residential real estate are probably less than what most people think they are.”
Over the more than 40-year period, real compound returns on stocks outpaced that of residential real estate, according to the study, with 5.95% average annual returns on stocks compared with 1.35% in realty. A dollar invested in stocks in 1963 would have compounded to $12.36 by 2006, while the same dollar would have grown to $1.79 in real estate.
The median price of new homes in the United States has risen since the early 1970s, with an average annual appreciation rate of 5.9% since 1963. But there have also been sharp corrections three times during the time period. It’s one thing if the homeowner is able to “ride out” the sharp downturns; it’s another if they’re considering the home as a potential retirement asset in the near future, the report said. via MarketWatch.
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Comment by finance girl on 15 February 2007:
I asbolutely agree with that. If you use a cost basis on your house, or rental property, and subtract that cost from the equity you have in your house, it’s pretty sobering. We own 2 homes in Seattle, which is a pretty good market, but when we subtract our costs from the homes we only realize a mid single digit gain year over year.
Comment by Phil on 15 February 2007:
It’s irresponsible to point to this study and then subtly discredit the findings because Fidelity sells stocks and bonds. You sell real estate, so I take your suggestion “with a grain of salt” too. The study sites hard data but you don’t dispute the findings by pointing to other hard data. You simply suggest that real estate is a great investment anytime, anywhere, and that people shouldn’t get caught up in “doom and gloom”. I don’t think there’s doom and gloom in this article. It’s simply a reasonable, logical analysis of return on investment. This type of cheerleaderism is what gives real estate agents a bad name…
Comment by Tom on 15 February 2007:
Phil,
First of all I do not sell real estate, so you can hold on to your salt.
Second, I am as distrustful of NAR as I am Fidelity as I am of Cigarette companies when they put out studies.
I think that real estate as a long term investment is a viable part of anyones investment strategy. Housing does appreciate and provides both financial and intrinsic benefits over the long term.
Personally I am invested in both real estate and stocks, and both have had their ups and downs but the diversification has done very well for myself.
I vehemently disagree with the statement that it is irresponsible to point out that a study paid for a company in one market sector that takes aim at another should be looked into carefully and taken with a grain of salt.
Comment by Phil on 15 February 2007:
Ok, my bad. Didn’t know that you didn’t sell real estate. I assumed that the “realestatebloggers” were people in the real estate industry. That said, you don’t really state what you do for a living on your about page. Nonetheless, I apologize for the accusation.
But I do think that your commentary is loaded. The article never said to sell your home and live in a mutual fund. Tons of studies have shown that equities do better than real estate over the long haul. This is just another one pointing out this fact. You can be distrustful of the results, but this is not the first organization to publish these types of results.
Secondly, Fidelity sells tons of stuff tied to real estate. You want those gains? You can get GSE bonds, you can buy home builder stock, you can buy durable goods stocks. You can even buy ETFs for commodities that run up during housing bubbles. The financial sector (Fidelity included) has done extremely well during the real estate run-up.
I think it’s time that Fidelity and other companies start singing from the hilltops. So much of this country is convinced that they should go way over their heads in debt to get on the real estate gravy train and they don’t understand that the last ten years have been an historical, statistical anomaly.
I will keep my salt.
Comment by Athol Kay on 17 February 2007:
Does Fidelity even take any form of leverage into account with it’s take on real estate?
I mean to invest $20,000 in the stock market you have to invest $20,000. Currently a $20,000 down payment gets you into anything from a $100,000 to even $400,000 dollar house depending on the mortgage.
Then when the house rises in value you get a pretty decent return on your investment. Not to mention you aren’t paying rent.
Comment by Analysis Guy on 21 February 2007:
The old leverage arguement. People need to remember leverage works both ways!
Price of home = $100k
Down Payment = $20k
5% DEPRECIATION = -$5K
Annual return on investment = -$5K/$20K = -25%
Why would you want to be in the market during a down cycle? Take San Diego for instance which just experienced a drop in 2006 that exceeded the ENTIRE early 1990s bust.
Historical Homes Prices of 50 Major US cities