Is owning a house a risky investment? Answer by Marco Giacoletti, Assistant Professor of Finance at University of Southern California
Is owning a house a risky investment? originally appeared on Quora: the place to gain and share knowledge, empowering people to learn from others and better understand the world.
Answer by Marco Giacoletti, Assistant Professor of Finance at University of Southern California, on Quora:
Owning a home is often seen as the American Dream, but it’s also a significant financial decision—arguably one of the largest an individual or family will make. Besides being the places that offer shelter to owners and their families, and the places where daily life unfolds, houses are also investment assets.
A house over its lifetime goes across multiple owners; a study over 2019-2021 calculated that the median time while a homeowner holds onto the same house is 13 years. Given that the median home put up for sale in the U.S., as of 2019, was built in 1978, we can see that homes change hands multiple times over their useful life. At the time of resale, homeowners realize price gains (capital gains), or losses. These price gains have been positive and large on average across the United States over the last two decades. The S&P Case Shiller Index, which tracks the price growth of resold homes, showed an average annual growth rate of 4.8% from 2000 to 2022, culminating in an impressive 280% increase over the entire period.
However, this growth is accompanied by substantial volatility. Timing of purchase and sale, as well as location, can dramatically affect the return on this investment. For instance, between 2006 and 2012, annual price appreciation rate for the US index was -3.2%. Disparities in growth rates are even more pronounced when comparing different metropolitan areas and neighborhoods. As an example, within the Los Angeles metro area over 2000-2022, house prices have grown by more than 7% annually in Culver City, but only by 5.6% in Montebello. Overall Los Angeles housing prices grew by 6% annually and in comparison, Detroit housing prices grew by 2.
