The ancient Greeks believed that man and his property had to be studied and understood for “the management of household affairs” (the translation for the Greek word we know as economics) to be successful.
The poet Hesiod put household economics into an interesting perspective: “First house,” he said, “then wife, then oxen for the plough.”
And so it has been that housing, through the ages, has been the cornerstone of most people’s investment strategy.
Obviously, things have changed from Hesiod’s time in terms of gender equality, but the perceived importance of a house, ahead of all other expenditures, remains in place for most people.
That could be a mistake. A study released recently by Oppenheimer Funds and Money magazine shows that a vast majority of Americans-70 percent of pre-retirees and almost 85 percent of retired people-believe that buying a house is one of the best ways for a young person to save for retirement. Survey participants rated a home behind only stocks and equity mutual funds as the investment that would provide the highest return over the next 20 years.
It’s not that a home is a bad investment, experts say, but rather that it should not be the central focus of an investment/retirement portfolio.
“If anybody thinks the house will `take care of my retirement,’ they have probably not thought through what they really need for retirement,” said Beth Gamel, a partner in the Lexington, Ky., planning firm Tax & Financial Advisors. “The idea that your house will provide for your retirement, in general, is not a healthy notion to have.”
It’s an emotionally charged issue, because the thought of a house not providing for retirement goes against what generations of Americans have preached and lived.
The current generation of retirees and near-retirees lived through what most people consider the greatest period of residential housing appreciation in history. But the current generation of homeowners and home buyers isn’t likely to see the same kind of return, meaning they will need a more diverse retirement nest egg.
According to data compiled by Morgan Stanley Capital International, residential housing provided an annualized average return of 7.2 percent between 1945 and 1993; the Standard & Poor’s 500, considered a good indicator of domestic stock market performance, returned 11.7 percent during the same period.
But over the past 10 years, residential real estate returned just 4.4 percent, and that drops to less than 4 percent-or just enough to beat inflation-during the last five years.
By comparison, the Standard & Poor’s 500 has an annualized average rate of return of better than 14.5 percent over the most-recent 5- and 10-year periods.
“Real estate has done a little bit better than inflation and not much better than cash, but anyone who bought at a market high or into a market that is having tough times is probably under water right now,” said Robert C. Doll, director of equity investments at Oppenheimer Management Corp. in New York.
“People who don’t look at what is happening in real estate could be making a dangerous assumption, It has a place in someone’s portfolio, but it is not one of the best places to save for retirement.”
A house isn’t a good retirement vehicle for more reasons than its average appreciation. All too often, it doesn’t build a sufficient nest egg because homeowners are unrealistic in their expectations for both returns and future lifestyle.
For example, a family home that cost $50,000 in 1965 and sells for $300,000 today would appear to provide a significant profit for retirement. But the family still has to live somewhere, and that may be a condo or a smaller house, but chances are good it won’t be a shack and that it will cost far more than the $50,000 original investment.
If it costs $150,000, the family still has $150,000 to put toward retirement, but that won’t go far in this era of longer life spans, higher costs and smaller pensions. In fact, one reason so many retirees feel comfortable about having the house as a retirement savings vehicle is that they worked during an era when company pensions were common. The proceeds from their house supplemented pension income.
Most of the current generation of workers have to largely provide for their own pensions. Residential real estate as a principal investment is not sufficiently liquid or diversified to provide the kind of safe retirement so many people still seem to expect.
“A house is a `use asset,’ which makes it more difficult to make the best, most logical financial decision,” said Paula Boyer Scheibe, a financial planning manager for KMPG Peat Marwick in Short Hills, N.J.
“Some people pour everything they have into a house, and expect it to appreciate and support them later on, but I doubt it will provide the kind of return they will need to live comfortably for 20 or 30 or more years of retirement.”
What’s ironic about the real estate warning emanating from the Oppenheimer study is that it comes at a time when many financial planners are advising their clients to pay off mortgages early.
With the return on savings being relatively low, paying off a mortgage early means a guaranteed return of whatever the current mortgage rate is, since the extra amount paid down doesn’t accrue that interest any longer. If the mortgage rate exceeds the return from, say, money market accounts, many experts advise paying down the mortgage, a strategy that would seem to be at odds with the need to diversify away from real estate.
Again, experts say, it’s a matter of moderation; paying down the mortgage is fine for someone with a diversified portfolio and satisfied with the holdings beyond their home.
“For someone with a broad plan, paying down the mortgage makes sense,” Doll said. “It’s the all-eggs-in-one-basket people I worry about. A house is a place to park your car, not your retirement assets.”
