One of my favorite things is reading an article that takes some fundamental assumption we all make, calmly demolishes it with data and statistics, and then handily concludes like Jackie Chan would after beating someone’s ass.
Last week, the NYTimes ran such an article.
The housing boom of the last five years has made many homeowners feel like very, very smart investors…
As the value of real estate has skyrocketed, owners have become enamored of the wealth their homes are creating, with many concluding that real estate is now a safer and better investment than stocks. It turns out, though, that the last five years – when homes in some hot markets like Manhattan and Las Vegas have outperformed stocks – has been a highly unusual period.
In fact, by a wide margin over time, stock prices have risen more quickly than home values, even on the East and West Coasts, where home values have appreciated most.
In social psychology, one of the cognitive errors we make is called the availability heuristic–basically, if something is more recent or prominent in your mind, you will weigh it more heavily in your decision-making.
I really like the NYTimes article. It doesn’t dumb down the debate by saying that real estate is “good” or “bad,” but instead shows how a bunch of factors–inflation, spending on home improvement, the recent housing boom, and the value of having a place to live–affect our impressions of real estate vs. stocks as investments.
I need to look into the data to understand it better, but my gut feel is that this is an excellent analysis because it takes a long-term perspective and discards the stupid emotions that cause us to mistakenly overvalue certain investments (“Everyone is making $200,000 on their home!! We have to buy now!!!”).
So do I think real-estate is a bad investment? Of course not. But I want to look into the data so I can answer the question I am getting more and more these days: “What about real estate?”
Read the full article: In the Long Run, Sleep at Home and Invest in the Stock Market
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