Buy Stocks, Not Houses, To Get Rich

schiller homes vs sp

The Case Shiller home price index (red) versus the S&P 500 Index (blue) since 1987. Source: S&P Dow Jones Indices

That’s the advice from Noble prize winning economist and housing expert Robert Shiller, speaking at a conference last week.

Shiller, who’s a professor at Yale University, says history shows that you’re better off putting money in the stock market, rather than the housing market, if your goal is to accumulate wealth. The stock market, he says, has shown much higher returns over time.

Shiller has made a career out of tracking the long-term performance of stocks and real estate, resulting in the widely used Case-Shiller Home Price Indices, which measure changes in home values over time, as well as the CAPE stock valuation ratios.

Shiller looked at the “real,” or after-inflation, returns of stocks and homes since 1890. “Essentially, home price capital gains overall have amounted to virtually nothing.”

Unlike stocks, homes require constant capital outlays for expenses like property taxes, insurance, maintenance, and renovation, all of which reduce eventual capital gains.

Still, owning a home is a net positive, since it encourages owners to get involved in the community, says Shiller, and provides them with a place to live. And home ownership, even if less lucrative, has been a means of wealth accumulation for many Americans who are not heavily invested in stocks and bonds.

Shiller emphasized something many Americans learned the hard way during the Great Recession: their homes should not be considered as an investment. Houses, he says, are items of consumption, just like a car.

As financial planners and investment advisers, we would certainly echo Shiller’s comments. We’ve seen too many cases where clients overspend on housing, convincing themselves that it is really a great investment. Houses do appreciate over time, but they don’t increase your wealth until you move out and actually sell them.

The Takeaway: There’s a three part message here. One, having a home you love enhances your quality of life, so go for it. But don’t overdo. Two,  investing in a diversified portfolio of stocks should be the core of your long-term wealth building strategy, so save regularly to make that happen. And three, use mortgage debt judiciously to keep your money working for you. If you can’t properly evaluate the options, ask someone to help you make the right decision.

About Mari Adam

Mari Adam, Certified Financial Planner™ has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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