A Home Is Quite A Shelter

In the 1970s, home values soared along with inflation. Hard assets almost always do well in inflationary times. In A Piece of the Action: How the Middle Class Joined the Money Class, author Joseph Nocera describes how "it became nearly impossible to go to a dinner party and not wind up spending half the night discussing real estate prices."

No more. Inflation is tame. Americans are pouring money into equity mutual funds at a mind-boggling rate. The new dinner-party chatter is heavy on the Dow. In these circumstances, is a home still a worthwhile investment?

Simply put, yes. Real estate is a sensible hedge against the Federal Reserve Board faltering in its fight to keep inflation down. What's more, real estate is a tax-sheltered investment. Owners get to deduct their mortgage interest payments, and capital-gains taxes are easily ducked. And you pay "rent" to yourself rather than to a landlord.

Still, how does investing in a single-family home compare to risking money in financial securities? To find out, economist Mark Zandi at Regional Financial Associates Inc. compared average annual returns for stocks, bonds, cash, and single-family homes. Unlike financial securities that are priced daily by investors, the returns to home ownership are tricky to calculate, requiring heroic assumptions about the value of an asset that varies a lot by location. Zandi's housing-return figure includes median price appreciation and what the house would cost to rent, less the cost of maintenance and property taxes. All investments are for cash. Taxes aren't taken into account.

HAPPY RETURNS. The result: Single-family homes outperformed Treasury bills between 1975 and 1995 (9.4% vs. 7.8%) but lagged behind stocks and bonds (14.2% and 10.5%). Over the past five years, stocks returned 12.1%, bonds 10%, housing 6.3%, and T-bills 5% (chart). Between now and 1999, Zandi figures that single-family homes will return 6.4% a year. Stocks and bonds will still do better than housing, he believes, but by narrower margins than in the first half of the '90s. In other words, a respectable return to home ownership. Of course, most homes are bought with a mortgage, and borrowed money magnifies returns. "Leverage multiplies the return on the upside and the risks on the downside," says Karl Case, economics professor at Wellesley College.

The housing market has hit a financial sweet spot. Prices aren't rising so fast that buying a home becomes too expensive. But they are sprightly enough to make buying a home a savvy move.

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