Looking ahead: buying a home

May 18, 2007

Recently I’ve been thinking about real estate from an investment stand-point. Our first home is probably two or three years away, but I can’t help but think about it now. Thinking about it now, though, will probably help us plan our savings and investments for these upcoming years. Basically, I’m wondering what emphasis should be put on our first house as an investment and what emphasis should be put on mutual fund investments and the like? I hope to explore this further and share my findings.

As a start I found this, which tries to compare real estate investments to stock market investments. It admits this comparison is practically impossible to make, because real estate transactions aren’t centralized like those of the stock market. Also, tax breaks on real estate and the simple ability to live in your home rent free also cannot be fully taken into account.

What does this article say to me (and mean to us)? …take this with a grain of salt, because I’m no expert.

When you buy your first home, consider that a long-term safe investment. Real estate historically has dropped at most 5% in any one year, while a notable stock market decrease could sink your investment 20%. And, apart from raising a family and having a place to call your home, you receive dividends in the form of free rent every month by owning a home.

Real estate, however, averages only a 6-7% appreciation per year, which is large enough to beat inflation, but doesn’t quite compare to the average 8-10% conservative experts say the market has been returning. The article above actually compares real estate and the stock market over the past 25 years, and while “home sale prices increased 247%[,]…the S&P 500 shot up more than 1,000%.”

So, if the stock market outperforms real estate in this way, should you buy real estate besides your home as an investment? Hopefully we’ll explore this question together in future posts.

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