by Bill McBride on 4/22/2014 08:35:00 PM
Tuesday, April 22, 2014
From Catherine Rampell at the WaPo: Americans think owning a home is better for them than it is
Over the past century, housing prices have grown at a compound annual rate of just 0.3 percent once one adjusts for inflation, according to my calculations using Shiller’s historical housing data. Over the same period, the Standard & Poor’s 500-stock index has had comparable annual returns of about 6.5 percent.First, as I've pointed out several times, Shiller used several estimates for changes in house prices. As an example, for the decade prior to 1987 (when the Case-Shiller index started), Shiller used the FHFA index. However this index was for a small percentage of loans. If he had used CoreLogic instead, the real return over the period Rampell analyzed would have been closer to 1.5% (much higher than 0.3%).
Yet Americans still think it’s financially savvy to dump all their savings into a single, large, highly illiquid asset.
Second, Rampell assumes the buyer paid cash - a much better model would have assumed 10% down, and would have had the buyer refinance every few years as mortgage rates declined. This also means there would be far less invested in the S&P500 than Rampell assumed.
Third, a young person might be happy with a $400 apartment in 1982, but I doubt they'd want to live in the equivalent apartment for 30+ years (marriage, raise kids, etc.). The model should assume a move-up buyer and renter at certain points.
I'm confident a more complicated and thorough model would produce the opposite result over the period in question.
• At 7:00 AM ET, the Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.
• At 10:00 AM, the New Home Sales report for March from the Census Bureau. The consensus is for an in increase in sales to 455 thousand Seasonally Adjusted Annual Rate (SAAR) in March from 440 thousand in February
• During the day, the AIA's Architecture Billings Index for March (a leading indicator for commercial real estate).
Posted by Bill McBride on 4/22/2014 08:35:00 PM