Is Your Home An Investment? The Facts Are In…

Is your home an investment? Is anyone’s home a good, long-term asset? For a long time, the answer was yes. And real estate is still a good deal for investors, but not the way you might think.

There’s a reason that Americans believed, at least until recently, that their homes have been a solid investment: It was true. Adjusted for inflation, the median value of an American home nearly quadrupled in the years from 1940 to 2000.

It was around the year 2000 that things went crazy. Yale professor Robert Shiller’s data, graphed by The New York Times, is the clearest picture of just how out-of-whack housing got in a very short period of time.

As the Census data also shows, home values took off as millions of American GIs returned from fighting abroad in World War II. Things settled down through the 1950s and ’60s, then we saw two strong booms, first in the 1970s and again in the ’80s.

Each time, Shiller’s index retraced to about 110. (The index benchmark of 100 is set to the year 1890 and inflation-adjusted.) Then, about a decade ago, boom!, straight to the moon — double the benchmark. The current S&P Case-Shiller Home Price data puts the index back to about 2003 levels.

Things seem to be getting better or, at least, not worse. Housing price tracker CoreLogic recently reported that the number of underwater loans, those in negative equity or nearly so, fell to 28.5% of all residential loans in the first quarter of the year, down from 30.1% in the previous quarter.

In effect, 700,000 more borrowers found themselves in houses they could sell for the value of their loans, presuming they could find buyers. Rising home values was the reason, CoreLogic said.

According to Mark Fleming, chief economist for the group:

In the first quarter of 2012, rebounding home prices, a healthier balance of real estate supply and demand, and a slowing share of distressed sales activity helped to reduce the negative equity share. This is a meaningful improvement that is driven by quickly improving outlooks in some of the hardest hit markets. While the overall stagnating economic recovery will likely slow housing market recovery in the second half of this year, reducing the number of underwater households is an important step toward reducing future mortgage default risk.

Is your home an investment? Yes…and no

The salient point is not that real estate is “back” as an investment. It never really went away. The Dow Jones Equity All REIT Index is up 9.4% over the past 12 months. Take that out to five years and the return is flat but still positive. Over 10 years, the return comes to nearly 85%. The iShares Dow Jones US Real Estate (IYR) ETF, which tracks the index, reports comparable results. (The five-year mark is negative, but the fund offers a dividend yield, currently at 3.4%.)

Importantly, ETFs such as the one offered by iShares buy far more than home loans. If you own the fund, you hold companies that own shopping centers, apartment buildings, office buildings, medical facilities, hotels, warehouses, storage units, even cellular phone towers.

The bottom line is that your home is not your “real estate” allocation. Real estate is, in fact, owning a globally diversified portfolio of properties. Your single home in a particular neighborhood is the polar opposite of diversification. Is your home an investment? No, it’s a roof over your head which, purchased wisely, can be a great way spread the cost of shelter over many years while taking tax breaks and generally enjoying life. Nothing more, nothing less.

Thousands of other people’s homes, the stores in which they shop, their offices and apartment buildings? Yes, those can be decent investments, all things considered.