The following appeared in a realtor’s brochure in a large city:
“Now is the perfect time to buy a house in our city. Over the past five years, average home prices in our region have nearly doubled. But average stock prices in the national stock market have actually declined over the same period. So homeowners have seen an increase in value for their housing investment during the last five years that far exceeds what they could have made by investing in the stock market. Our city’s residents can surely achieve a similar profit over the next five years. Furthermore, if residents invest in a home, they can enjoy the use of the home while its value increases, whereas money invested in stocks would not contribute to their quality of life in the same way that owning a home would. Therefore, all the residents of our city should invest their money in a home.”
In this realtor’s brochure, the real estate company advises all residents to invest their money in houses rather than in stocks. This advice is based on two questionable assumptions: first, the stock market has declined over the past five years whereas the housing market has doubled in value over the same period; second, owning a house improves a person’s quality of life. However, I do not find the advice logically convincing because oversimplification makes it problematic in two main respects.
First of all, an investor would be simplistic and short-sighted to base a life-long investment policy on so short a period as five years. The real estate’s company argument fails to account for the fact that markets, including the stock market, move in cycles, with downturn following upswing as the cycle is repeated. The advice of the real estate company might prompt residents to sell off valuable stocks at a loss at the moment the stock market is about to recover.
Second, just as the stock market produces cycles, the housing market produces bubbles. House prices simply cannot go on increasing indefinitely and if they have indeed doubled over the past five years, the market could be due for a correction. In 2006 and 2007, Americans invested in property for the same reasons that this real estate company claims, namely that the housing market had been rising steadily and that everyone should enjoy the benefits of home ownership. However, by mid-2008, the overheated housing market imploded, leaving many of these new home owners with losses and high mortgage payments. Following the real estate company’s advice could lead people to buy houses at the moment the housing market is about to collapse.
Finally, even if it is true that the housing market has consistently offered a higher return than the stock market, the argument that a house adds to the quality of one’s life is still questionable since it fails to take into account the costs of home ownership. A homeowner commits to living in one fixed location with less flexibility of moving; he also needs to pay the costs of maintenance, utilities, property taxes, and insurance. Furthermore, a homeowner is responsible for mortgage payments over a long period of time and at rates which might increase in the future. Because home ownership, whether or not it is a sound financial investment, is not appropriate for everyone, recommending all residents to invest their money in a home is simplistic and irresponsible.
Clearly, the advice of the real estate company is self-serving, so it is not in the best interests of all residents. The real estate company fails to take into account the cyclical nature of the stock market and the housing market, and also fails to consider the costs of home ownership. Therefore, people considering choosing between buying stocks and buying a house would be well advised to research further these additional considerations that are absent from the real estate’s analysis.