The Wall Street Journal
April 22, 2014
By John Kimelman
Though this column is normally devoted to articles about stocks and bonds, there is an asset class that many still believe is a bona fide solid investment – a home.
As the Washington Post tells us, Americans, in a recent Gallup poll, view real estate as the best long-term investment.
But the Post's Catherine Rampell makes the case that Americans have allowed their love of hearth and home to cloud their judgment. "Over the past century, housing prices have grown at a compound annual rate of just 0.3 percent once one adjusts for inflation," she writes. "Over that period, the Standard & Poor's 500-stock index has had comparable annual returns of about 6.5%."
So why is it that Americans still think it's financially smart to dump most of their savings into a single, large, highly illiquid asset?
"Perhaps Americans just want to invest in something tangible. Real estate is, after all, real: bricks, mortar, wood, tile," she writes. "Other kinds of assets seem more abstract, almost imaginary, by comparison. You just have to trust your financial adviser, bank or never-ending, entire-rainforest-killing Vanguard mailings that your other investments actually exist."
Rampell concludes: "As senators mark up legislation next week that would wind down [Fannie Mae and Freddie Mac,] expect great hue and cry about whether an overhaul of the mortgage system would make homeownership less affordable. But given the many other subsidies that exist, and Americans' persistent misperceptions about the financial benefits of buying a house, maybe we can afford to make homeownership slightly less affordable."
The Post piece is a refreshing dose of common sense. I would argue that it doesn't even tell the full story of just how poor an investment a house can be, especially after one factors in the renovation costs that people pour into homes – costs that are rarely full passed on to the next buyer.
No one spends money to renovate their stock and bond portfolio. An investment is supposed to pay you periodically, in the form of income, not bleed you periodically.
I'm not suggesting that people should rent for the rest of their lives. There are many psychological advantages to homeownership. Just don't confuse a home for a bona fide investment.
Investors, of course, can make money off of commercial real estate, which, unlike your house, can pay you a cash dividend.
But a Forbes article is concerned about Chinese commercial real estate right now since a man it regards as "China's Warren Buffett" is selling, not buying, right now.
"The disposal of a landmark project in the center of Beijing—two office buildings, two blocks of serviced apartments, and a mall—confirmed that Li Ka-shing and son Richard have turned bearish on Chinese real estate," writes Forbes. "Li, reputed to be the richest man in Asia, and his family have been on a selling spree in Mainland China since last August."
During that time, Forbes writes, Li has unloaded Guangzhou's Metropolitan Plaza, Shanghai's Oriental Financial Center, and Nanjing's International Financial Center.
The Forbes article goes on to say that "it would be nice to think that Li, an octogenarian, is dumping assets at the end of an illustrious career so that his China sales say more about him than the state of the Mainland property market. Yet Li is busy redeploying assets to Europe, indicating he is not exactly contemplating retirement. And in some ways the Hong Kong disposals are an added indication of his bearishness because the city's economy is so tightly bound to the rest of China these days."
Meanwhile, the Financial Times points out that corporate bonds are "finally having their moment in the sun after years spent in the shadow of better performing junk debt and equities." (A subscription is required to view article.)
According to the FT, "total returns for long-term investment grade bonds stand at 7.48% so far this year according to Barclays indices. By comparison, junk bonds have returned 3.3% so far in 2014, below the overall 3.59% gain seen for the broad U.S. investment grade universe."
Indeed, the strong performance for long-dated high-quality bonds so far this year runs counter to the market