From time to time “economists” from the National Association of Realtors publish propaganda pieces on how great real estate is. For example, just last week they published an article on how “homeownership presents a great pathway to build wealth“. If you ever need an example of how to lie with statistics this serves as a great beginner’s manual. They start by sharing an interesting finding from a Federal Reserve survey: “Among all families, the ownership of a primary residence typically accounts for 90% of total wealth”. To their credit they don’t try to directly conclude anything from this but, given the proximity in the article of this finding to their central thesis, I’m pretty sure they want readers to conclude that this is the primary evidence that homeownership creates wealth.
However, all it really proves is that if you put most of your wealth in a particular asset class then that’s where most of your wealth is going to be. The fact of the matter is that, for many Americans, the forced savings of mortgage payments are the only way that they save. In fact, the article provides a bit more data on the subject and you can see that, as income goes up, housing represents a smaller and smaller percentage of their wealth. In other words, people at the lower income levels stretch their budgets to buy a house and, therefore, don’t have any money left over to save in other asset classes. If Americans were as obsessed about art as they are about home ownership then I have no doubt that 90% of our total wealth would be in art.
It turns out that they also made a few mistakes in the article, one of which highly inflates the 90% number. They say that housing is 90% of the wealth of American families but, in fact, it’s really 90% of their assets. If you want to get to wealth you would have to subtract out the value of mortgages. They don’t do that and it has a huge effect. For instance, if you assume that the average American only has 20% equity in their home then that 90% number drops to more like 64%. And their data labeled “median value of holdings in any type of financial asset” is really the holdings of non-residential assets. Otherwise their math doesn’t work out.
Next the article proves what a great investment housing has been by showing how much wealth has been accumulated over time by homeowners: “Nationally, a person who purchased a typical home 30 years ago would have typically gained about $283,000 as of the second quarter of 2020. Of the total wealth gain, 67% or $192,600 is from the price appreciation of 3.7% annually.” However, there are a few sleight of hands going on here:
- It’s easy for the casual reader to miss this but they were actually honest enough to break out $90,000 of the wealth gain as attributable to principal payments. In other words this portion of the wealth gain is the forced savings effect. The average homeowner could have just as easily put that $90,000 towards art or stamps. It’s not really a wealth gain attributable to housing but rather just money transferred from one pocket to another.
- There is a significant assumption here that homeowners stay put for 30 years. In reality though they move every few years and incur significant transaction costs that eat into that wealth gain.
- They are bragging about 195% price appreciation over a 30 year period beginning in April 1990. However, over that same time period the S&P 500 returned 1413% with dividends reinvested. So if you are looking at a home as a wealth builder (you shouldn’t) the stock market blows real estate away.
One of the more interesting parts of this article are tables of data on home price appreciation over different time periods for various metro areas. Unfortunately, I can’t find Chicago on the list, although there are numerous other Illinois metro areas listed. I can’t imagine why they would leave one of the nation’s largest cities off the list but it’s interesting to note that none of the other Illinois metro areas come up very high on the list in terms of appreciation. But one of the key takeaways from the data is that, as you’d expect, “location, location, location”.
Gary Lucido is the President of Lucid Realty, the Chicago area’s full service real estate brokerage that offers home buyer rebates and discount commissions. If you want to keep up to date on the Chicago real estate market or get an insider’s view of the seamy underbelly of the real estate industry you can Subscribe to Getting Real by Email using the form below. Please be sure to verify your email address when you receive the verification notice.