The inspiration for today’s missive comes from Nick Murray’s incomparable industry newsletter.
Last month, the Wall Street Journal’s Luxury Homes Section ran an interesting article: “Groucho Marx’s Onetime Long Island Home Hits the Market for $2.3 Million”
The star paid $27,000 for the property in Great Neck on New York’s Long Island, in 1926. He lived there until 1931.
Marx, previously a city dweller, had difficulty adjusting to the suburbs. He said, “I am becoming well versed in the four topics of conversation, which are of paramount importance in a small community, i.e., domestic help, golf, bridge, and the trappings of mice.” Sounds kind of grim.
It recently hit the market with an asking price of $2.3 million.
Murray read this article and immediately wondered what that $27,000 would be worth today if it had been invested in the S&P 500 in 1926 instead. He assumed all dividends were reinvested and no withdrawals taken.
Would it be more or less than $2.3 million? Care to take a guess?
Answer: About $333 million dollars!
Put away your pitchforks – I’m not telling anybody to put all their money in the stock market and forget about buying a house. Of course, this is just one house – your mileage may vary.
I realize the scenario of investing and never touching an investment account for 97 years is really more of a thought exercise than an actuality.
In reality there would be carrying costs, namely taxes to be paid on the dividend income.
However, houses also have carrying costs: real estate taxes, homeowner’s insurance, utilities, upkeep, repairs, and renovations. As any homeowner can attest, these costs are often significant and always unrelenting.
When you sell your home, there are transaction costs as well. Clients of mine who recently sold their home for just under a million dollars had closing costs (primarily real estate agent commissions) of over $52,000.
Houses do have tax advantages.
The mortgage interest is deductible as are real estate taxes. But these are deducted only if you itemize deductions. Since the Tax Bill of 2017 far fewer taxpayers itemize. Further, the tax deduction for real estate and state income taxes is no longer unlimited, but capped at $10,000.
There is a capital gains exclusion on the sale of your primary residence – single taxpayers can exclude $250,000 of gain and marrieds $500,000 provided certain conditions are met.
Of course there are non-monetary upsides to home ownership that no investment portfolio can replicate.
No landlord and you can paint and renovate to suit. For many it’s a place to raise a family and make memories. And it keeps you out of the rain.
But as an investment, on average, according to the Case Schiller home price index, houses show a long-term compounded rate of just ≈1% above inflation. Compare this to the S&P 500’s (with dividend reinvestment) ≈7% above inflation.
You may well make money on your house – but keep in mind it is not the only wealth-creating game around, and generally speaking it’s not the best one.
