Repeat After Me: “Appreciation is a Loser”


In the reality TV shows, the “investors” gather around the courthouse at auction time, betting on the best property to buy and flip.

Amid the story lines and the personalities it’s easily to lose track of the real reality:  the odds are that if they sell in less than 13 years they will do better putting their money in a checking account at two percent interest.  Perhaps that’s why there’s usually a big time loser crying in his latte in every third show or so.  Usually, however, the losers don’t realize the full consequences of counting on appreciation until they complete their rehab, put it on the market and find out that foreclosure discount and appreciation aren’t get the bad news.

Yes, there are rare markets that appreciate quickly—like the current one.  But all the signs are pointing to a slow down and flattening out of prices for the balance of the year.  Buyers can read those signs too, so if you’re getting ready to market a property, hurry up.

For investors who are in it for the long haul, including owner-occupants who are told to think of their home as an “investment,” it’s time to put aside the myths real estate agents and others like to perpetuate about the appreciation of real property and check in for a reality check.

A Surprising Study…

Two economists at the Atlanta Federal Reserve, Ellyn Terry and Jessica Dill, did just that and published their findings last week.

Three caveats:  They did not factor in political incentives to own a home, such as the mortgage interest deduction, nor did they credit homeowners with savings from rent money that owners would have realized.  They did not look at the “buy and hold” strategies popular among investors seeking cash flow from rents, but only at appreciation.

They crunched the numbers back to 1926 and found that, if a home is purchased only as an investment and not as a place to live, a comparison of average annual returns clearly shows that though most homeowners make a slightly positive return, investing in equities offers favorable returns more often than investing in housing.

With average returns on investment for owning a home so close to zero, just how often has the housing market produced losers? And how does investing in housing compare to investing in equities?

They computed the average annual return of home prices across all possible combinations of start and stop points using the Shiller house price series from 1926 to 2012. The distribution depicts returns concentrated around zero with some skewness to the right. Eighty percent of all start-stop point observations experience some degree of positive return.

To take into account the duration of ownership, they assumed that the average homeowner lives in his or her home for 13.3 years, based on analysis by Paul Emrath at the National Association of Home Builders. They found the average annual returns for an asset held for a period of 13 or more years is substantially less volatile than for an asset held for fewer than 13 years, and those investing for the longer term were much more likely to have positive returns.

“We compute that 40 percent of homes owned for less than 13 years have negative average annual returns, compared to 12 percent of homes owned for 13 years or more.  Interestingly, while a much greater portion of those owning for 13 or more years obtain positive returns, the average annual return was actually slightly higher for those owning fewer than 13 years (0.95 percent versus 1.03 percent),” they found.  So much for flipping.

They applied weights for average length of ownership. Using the weights, they recomputed average annual returns across all possible combinations of start and stop points for average length of ownership. The distribution continued to show that returns are concentrated around zero with skewness to the right; two-thirds of all investors in this distribution experience some degree of positive return.

They ran through this same exercise with the S&P 500 Index (used as a proxy for the stock market) to provide an apples-to-apples comparison of the average annual returns that one could expect from an alternative investment in stocks. The results depict a wider distribution, with longer, fatter tails and some skewness to the right. In other words, there is more volatility in terms of return, but with volatility comes an opportunity for larger gains over time. In fact, the weighted average annual return of the S&P 500 is 4.55 percent, compared to 0.97 percent for the Shiller real home price index.

“It’s important to note that the distributions of returns for housing in all these computations are not the distribution of returns for every possible house purchase. Likewise, the returns shown for the S&P 500 are not the entire universe of returns from buying and selling individual stocks. Instead, these returns are based on a pool of housing and a pool of stocks,” wrote Terry and Dill.

“Further, the returns to housing in the chart ignore the fact that homeowners might have additional gains from owning if their mortgage replaces rent. Indeed, according to some calculations, homeowners who buy a home today and hold it for seven years can expect to pay 44 percent less than people who choose to rent,” they concluded.

In a recent interview, Robert Shiller suggested two percent was about the appreciation to expect on a residential home, even after 13 years.  The two researchers concluded that was about right.

Photo: Connor Tarter

About Author

Steve Cook is the editor of Real Estate Economy Watch and writes for a several leading outlets in addition to BiggerPockets, including Equifax and Total Mortgage. He also provides communications consulting services to leading real estate companies. Previously he was vice president of public affairs for the National Association of Realtors.


  1. My favorite show is the guys in AZ buying foreclosed homes at auction. A group of characters stand outside basically gambling the house is not a shell. When they win they get to pay $250k-$400k for the place with the expectation of reselling for $8k-$30k of profit.

    Pretty big risk of capital for those poor returns if you take into account the downside risk.

    I could make the same return with no risk in Philly buying row houses, for a 20% of the capital.

    I count this off to the media trying to heat up the RE market. Wouldn’t it be interesting reality television to track these transactions to the end sale and then do the math.

    Leaving out forced appreciation, and that caused by inflation, I would be most markets don’t even see 2%.

  2. My first home in 1969, 3 more after that. Equity pull out, and invested in income properties. Very happy, and now reverse mortgage, so live free in your own home for ever, no more mortgage!!!

  3. Their analysis seems to be missing some description. Given the positive skew in chart 1, I assume that they are including another variable in their calculations that I didn’t see mentioned in their summary such as commissions, upkeep, or inflation.

    All three of these seem reasonable to include, but doing so really changes the tone of their findings.

    Or maybe I’m missing something – I have a 3-month old and am pretty sleep deprived 🙂

  4. I have always benefited way more than that in far less than 13 years – as have all of my friends and family.

    Not sure how they get those numbers – or why. If they want to invest in stocks – fabulous.

    As for me and my household, real estate is king and waaaaaaaaaaayy beats their scary numbers.

  5. These numbers no doubt include homes I would consider “Slums,” where the owner is looking for cash flow while the property continues to decline in value. I would hate to be overly optimistic, but based on the housing market from 2009-2012, a buy-and-hold investor looking to hold for 10 years could basically get 2% per year locked in at the time of purchase… without counting on any further appreciation.

  6. Am I missing something? Been buying properties for over 45 years, averaging 20% plus returns, at 42 retired on the cash flow. Renters not only pay off my mortgages but help in purchasing additional properties. There is no way I could get people to buy stocks for me and get the returns that I receive from real estate. With tax write offs, 15% tax bracket (if I paid taxes) and 100% control, doing better than my brother who went the 401 k route.

    • Matt Devincenzo on

      You have to remember this is the aggregate of all homes(from what I understood). That includes the slummy slums and the ritzy palaces of malibu that people might invest in that you and I might consider poor investment choices. It didn’t take into account the calculated purchase of a true cash flow property(this was specifically excluded according to this post) it is only speaking to appreciation.

      Remember RE is local not global generally speaking so large studies can skew the results out of line what can actually be accomplished. I would agree with the post though appreciation investing is not where I’d choose to park my money, unless it was a very calculated purchase based upon local knowledge.

  7. Jeff Brown

    These numbers have no bearing on specific investors in equally specific markets/eras/property type. In my nearly 44 years if the clients averaged the silly returns reported, I’d of been a cook at Denny’s long ago. 🙂

  8. JB, a cook at Denny’s? No way man, your alternative life would be wearing a blue suit calling balls and strikes in MLB! How about them Huskies shutting down Boise State Saturday?

    I am setting up a game day at UW next September with a few former teammates, how about you plan to come up for a incredible day watching UW play EWU at the New Montlake UW stadium and we take a boat ride to the stadium?

    merk out

Leave A Reply

Pair a profile with your post!

Create a Free Account


Log In Here