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Investing for a Lifetime: Managing Wealth for the "New Normal" by Richard C. Marston

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CHAPTER 13 The Home as an Investment

For many years, Jonathan Clements wrote an influential personal finance column for the Wall Street Journal. One theme he revisited every year or so was the folly in believing that your personal home was a good investment. He argued that an investor would be much better off buying a modest home and investing more in a conventional portfolio of stocks and bonds. Don’t buy a $1 million home, he said. Instead, buy a home for half that amount and invest the extra $500 thousand in stocks and bonds. This chapter will show the merits of Clements’ argument. Clements will be shown to be right even if we examine housing prior to its recent collapse.

For many families in the United States, their home is their largest financial asset. In most cases, home ownership is leveraged with mortgage debt with the latter typically representing the largest financial liability of the family. But even taking into account mortgage debt, home ownership represents a substantial portion of net worth for many families. So it’s important to study returns on homes as part of a larger study of investing.

Until recently when house prices fell, many families believed that home ownership provided some of the highest returns that they earn in their lifetimes. One of the reasons for this belief is that families often suffer from “money illusion.” If your house doubles in value over time, that may or may not be a good return on investment. It all depends on how much the cost of ...

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