The Compound and Friends - Your House versus the Stock Market with Josh and Ben Carlson

Episode Date: April 3, 2019

"Home ownership is often called both the American Dream and the biggest investment of your life. It’s debatable whether a house is truly an investment or not, especially when we’re talking about your primary residence." Ben Carlson, institutional asset management chief at Ritholtz Wealth Management did a post about why comparing the price appreciation in housing with the stock market is not a great idea. Downtown Josh Brown gets him on the phone to explain exactly why investors and home owners should keep their feelings about their primary residence away from their asset allocation decisions. You can read more about Ben's take on real estate vs the stock market at his blog, A Wealth Of Common Sense: https://awealthofcommonsense.com/2019/03/real-estate-vs-the-stock-market/ Enable our Alexa skill here - "Alexa, play the Compound show!" https://www.amazon.com/Ritholtz-Wealth-Management-LLC-Compound/dp/B07P777QBZ Talk to us about your portfolio or financial plan here:  http://ritholtzwealth.com/ Obviously nothing on this channel should be considered as personalized financial advice just for you or a solicitation to buy or sell any securities. Please see this 3,000 word terms & conditions disclaimer if you seriously need this spelled out for you.  https://thereformedbroker.com/terms-and-conditions/ Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

If you're listening, I'm on with Ben Carlson of A Wealth of Common Sense. Ben did a post about why real estate as an asset class and your house price specifically can't really be compared to how the stock market is done. And we tweeted it out this morning, and people are going crazy, like hundreds of comments on this. First of all, why do you think people react in such a big way whenever you write about housing as an investment? Obviously, there's this whole stuff about the American dream, and it's the biggest investment of your life. But it's such a personal asset to you, and people have such a personal stake in it. So it is crazy. I shouldn't be surprised anymore, but I kind of am. Every time I write about the housing market, there's tons of feedback and tons of comments and questions and people pushing back. And it's obviously a topic

that strikes a lot of emotion for people. So the best, to me, the best point that you make, and there's a lot of good points and we'll link to the posts in the notes, but the best point that you make is that looking at the price appreciation of your own house and then saying, you see, that was better than the stock market. It's almost like saying I bought this one stock 30 years ago, and it turned out to be Berkshire Hathaway. It's almost like an impossible way of looking at it, but people can't help themselves because their only real experience is their own experience. Yes. And we're dealing with big numbers too. And then there's those stories where one of my grandparents bought a house in the 1930s for $3,000 or whatever it is and look at how much it's worth now. So I think it's just, it's hard for people to wrap their head around because it is such a big number and they have this sort of big emotional investment in it.

But comparing it to stocks is just, I mean, I'm a homeowner. I know the cost involved. It's ridiculous. And obviously, you have to live somewhere. So you're renting or buying. But the comparison between the stock market is so difficult because there are so many costs and ancillary issues that pop up with being a homeowner that it's just not apples to apples. And if you're buying a stock ETF, even a stock itself, stocks manage themselves. A house does not. You have to actually do something and keep it up and maintenance and pay taxes and all these other things on it. You know what else somebody pointed out that gets lost in this conversation? Nobody brings up leverage.

So it's like – so you bought a house in the 1980s and you put 20% down. So 80% of the purchase, you use leverage. Let me see you do that with the S&P. Put on 80% more S&P with leverage. Let's see if we're having the same conversation then. Yeah. And obviously people point to places like San Francisco, New York, where maybe housing price appreciation has been better, but it's all circumstantial. And if you pick the wrong time to go all in on something like this, it can really be damaging because it's the roof over your head. Right. The other thing that I thought was interesting – so you ran two different data sets, Case-Shiller and I forget what the other one was. But it was trying to nail down what house price appreciation has actually been over these multi-decade stretches of time.

But you're skeptical that that data is real, and so am I. Why should we be skeptical? And there's like a 5% difference between the data. And people told me, well, the new data from the San Francisco Fed tried to do imputed rent, which good luck trying to estimate that on your own home or come up with a good yield on your house. And then obviously there's a difference between owning your home and renting, but this data goes back to the 1800s, which, I mean, good luck trying to find data that worked back then, or I don't know what they were, were they running in the sand? I don't know. It just seems it's hard to go back that far.

Looking at sales in a newspaper and then estimating all the other properties that might've cost the same thing. So yeah, it's just hard to look at these averages. And I'm not saying that you might not earn a return on your house. It's just, I don't think you should ever go all in on something that's such a huge personal emotional asset to you and have that be the bulk of your financial plan when it's already such an important aspect of your life. Now, in the pro-housing as an investment camp, though, you could also say you're looking at stock market returns going back 150 years, but you couldn't have actually owned the stock market either. So that data is not reliable. And if you did own the stock market, you were paying like 10% commissions to buy and sell

individual equities. You couldn't own an index. So if you wanted to get broad representation, you had to do like a thousand trades a year, which most people weren't doing. And then there's all the survivorship bias stuff that's in any database of long-term returns. So the pro housing camp could say, okay, you think my data is nonsense. Wait till you see how your sausage was made. Yeah. And the other positive is it's an illiquid asset. And so you're kind of stuck with it. Because if you were looking every day, if you're waiting for the housing market to open at 9.30 a.m. every day to see what your house is going to open up at after the housing data, you'd drive yourself insane. You'd pull your hair out because no one wants to see what the price of

their house fluctuations really is. And we all think it's probably worth more than it really is in a lot of cases. So that's a good thing in a lot of cases. You know, I think I think Med Faber did something about this where he was saying I don't remember if it was a tweet or a blog post, but he was saying the reason why the richest people, you know, are all real estate people is one very simple explanation that defies geography, age, whether it's commercial or residential or any of those other considerations. The reason why all real estate people are rich is because they never sell. And if they do sell, it's a 1031 exchange. They have to buy something else very quickly. They never, ever get out in a way that stopped people, you can't say the same thing.

Yeah. My whole point is just go in with your eyes open because I, again, as a homeowner, I know the costs that go into it. And I just think it makes sense for people to understand trying to calculate a return on your home is much harder than it sounds. Right. So even if you're not even talking about remodeling the house, you're just talking about replacing things that break. You're talking about new appliances every five years. You're talking about doing some landscape, paying for some – that stuff doesn't show up in Case-Shiller data because it can't. But it's real. It exists. Yes. Yes. There's a lot of that, and it's just – plus you're so emotional about it that it's hard to ever think straight when you're thinking about your own house. Right. So don't you think it's reasonable for people to just say, you know what? A home is a good investment for reasons that are not financial. It provides stability for your family. It puts you in a community. It gives you a sense of responsibility.

But then also you should maybe do stocks too. Yes. Isn't the reasonable answer to this debate to just do both? I don't know where I stole this phrase from, but I love the term psychic income. Yeah. Why else would someone pay $10,000 for a dress to wear for one day on their wedding? Because it makes them feel good. That's why you buy a house too.

Yeah, because you're only really going to have one wedding and you're only really going to have one – like if you're going to buy a house and it's not to rent out to someone else, you live there. So what's the difference? And maybe you should be married to your house because if you try to trade up and switch houses every few years, you're paying a bunch of frictional costs that take – eat into your return even more. So holding on to a house for a long time actually is a good thing.

Oh, yeah. Forgot it. And where I live, like to get a realtor and then an attorney and then do the closing, and then you got to hire one of these Israeli moving companies, and they're all like X. They're all like X, whatever the Israeli equivalent of the Navy SEALs is. Like that whole process, if you do that more than three times in your life, you're making a mistake. It's too much.

All right. Ben, I'm going to link to the post in the notes. I thought it was really good. For anyone that wants to leave any feedback on this, we'd love to hear it. All right. I'll talk to you later.