Now that the housing bubble has crashed, a growing number of academics, journalists, and financial gurus are trying to reassess the value of real estate as a long-term investment class.
There is a growing — and much needed — consensus that much of the conventional wisdom about real estate as a “great investment” is over-hyped and oversold by the National Association of Realtors who also happen to be a powerful lobbying group, dictating our national housing policy.
The Wall Street Journal’s Cheapskate columnist looks at housing and reaches a good conclusion (subscription required), explaining that the real financial return of homeownership comes from not having to pay rent: “That’s why you should buy as much home as you need — but no more. A bigger home than you need isn’t an investment — it’s an extravagance, the equivalent of renting a bigger apartment than you need. You may choose to do so, but that doesn’t make it a smart move financially.”
Unfortunately though, Cheapskate also makes a key math error in calculating the return on his real estate investments over the years: “When I constructed a very basic cash-flow model for our home-buying history-selling price minus purchase price, renovations and repairs — it showed a roughly 3.5% annualized return on investment, from 1991 through the summer of last year.”