For many families in the United States, their home is their largest financial asset. In many 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 wealth for many families. So it’s important to study returns on homes as part of a larger study of investment returns.

Many families believe that home ownership provides 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 living has risen over the same period. Too often families view the nominal appreciation of their homes as the return on their investment.

This chapter will examine the real returns on housing since the 1970s. The primary source of data will be price indexes maintained by the oversight agency for Fannie Mae and Freddie Mac, the Federal Housing Finance Agency (FHFA). The predecessor to FHFA, the Office of Federal Housing Enterprise Oversight (OFHEO), developed these indexes in the early 1990s using series that Fannie Mae and Freddie Mac had developed earlier.13 Many of the housing series extend back to the mid-1970s. The indexes use a repeat-sales methodology developed by Case and Shiller (1989) ...

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