Posted by on Dec 4, 2015 in Articles & Advice, Blog, Featured |

Photo Credit: Jason Zweig

By Jason Zweig | 12:54 pm ET  Dec. 1, 2015

My Thanksgiving-weekend column meditating on the pleasures and sorrows of home ownership, “The Real Value of a Home,” drew remarkably diverse comments from readers.

Several commenters raised points I would like to address. Poor Choice wrote:

“…maybe there are such dramatic structural changes in the labor market that there just isn’t any practical way for someone to stay in the same place for that long. Perhaps the exigent transaction costs, both in fees and extreme price volatility across geographic regions and any given moment, makes ownership a poor “choice” for a generation that knows it will more than likely have to move every few years. Maybe this generation very much wants your blessed experience but lives in different economic times?”

I didn’t mean to imply that I think owning a home always makes sense for everyone or that renting is somehow irrational.

Five years ago, while researching a column on the brilliant and unfortunately neglected economist Melchior Palyi, I came across a speech by the former German central banker and University of Chicago professor that I’ve never forgotten. (Unfortunately, it’s not available online to the best of my knowledge, but I did transcribe passages verbatim from the Palyi files at the university’s library.)

Addressing a meeting of the U.S. Building and Loan League, a trade association of mortgage bankers, on Nov. 18, 1938, Mr. Palyi warned that the U.S. was launching a long-term trend that would lead to trouble. Even then, decades before President George W. Bush promoted the “ownership society,” politicians and bankers were arguing that the government and the financial system should encourage everyone to own a home.

Mr. Palyi, who had fled Europe to escape the Nazis, was alarmed that mortgage debt and the commitments of owning a home might nail Americans into place — the same way tens of millions of Europeans tended to spend their entire lives in the same spot. That lack of mobility, he said, was the biggest obstacle Europe faced in trying to compete with the fluid American economy, in which workers were not “fixed to the ground” and could pull up stakes at will to follow the flow of jobs wherever it took them.

“It is not a good idea to try to make good citizens out of people by overburdening them with housing costs and by persuading them to invest in housing projects which are beyond their means and for which they cannot pay,” thundered Mr. Palyi.

Too many owner-occupied homes “make the population fixed to the ground,” he said. “A country on wheels can be a very happy country, while a country on fixtures can become a very unhappy one.”

I thought of Palyi’s speech when we learned that my mother’s realtor had found a buyer for the house. The relief my mom showed was palpable, and her happiness at the sale caught my brother and me by surprise. After all those years, and notwithstanding all the memories our home had stored up for her, she was glad that she could leave it, too.

Finally, musthavebeennice wrote:

“…you can no longer afford to buy such wonderful pieces of property. $13,000 in 1961 is worth $103,000 today. Show me a 96 acre property with a 2 acre lake for $500,000 and I would be surprised. This article is condescending to people who live in a world very unlike the one you reminisce.”

That may be true in many parts of the U.S., but my mother’s realtor, Noah Spivak of North 40 Real Estate, says raw land near our house sells for around $1,000 an acre — sometimes more, sometimes even a bit less.

It’s also worth noting that without the time to go through the full historical-cost records of my parents’ property, I can make only a guess at their rate of return between 1961, when they bought, and this past week, when my mom sold. My very rough estimate is that it amounts to a rate of return of about 4% annually, roughly equivalent to the rate of inflation over the same period — in other words, a real return fractionally better than zero. Account for the money they might otherwise have incurred in rent, and the return would be slightly higher.

On the other hand, once you factor in repairs, routine maintenance and annual property taxes along the way, plus commissions and other costs on the final sale, the return after inflation would be negligible or even negative.

All this coincides with research by Yale University economist Robert Shiller, who has found that real estate generally keeps pace with inflation but seldom offers any return premium above that. The 10% annual rate of return that realtors often used to cite to homebuyers is as mythical as a hippogriff.

Prof. Shiller himself, who owns a primary residence as well as a vacation home, says he doesn’t expect to earn much, if any, financial return on them. Real estate in the New Haven, Conn. area, he says, “has gone nowhere as an investment” and is “below its 1987 value in 2014,” adjusted for inflation. That doesn’t bother him or his family: “We have been happy,” he says. “We like our neighbors and sense of permanence in our homes.”

The symbolic value of a house you own is great. Its value as an investment is limited.

Source:, MoneyBeat blog