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The old saying is that, “there’s no place like home.” Yet from my view, there is simply no place like the stock market. When it comes to retirement planning, it is hard to make a better long-term investment. According to research by Edward Jones, over the last 20 years, the average U.S. home price has appreciated about 5.5% per year versus an 11.4% yearly increase in the S&P 500, a broad market index of large U.S. companies.
The wide gap in returns may seem hard to believe given recent history when real estate has been so red hot. Home prices in some markets jumped more than 25% in just a year’s time and stories of bidding wars were not uncommon. Of course, all of this exuberance was fueled by historically low mortgage rates and creative financing.
But when things seem too good to be true, they usually are. I fear the easy money that put the air in the housing bubble is going to leave a lot of people strapped–particularly in our community. Whether you believe the real estate bubble is about to burst or that it is suffering a temporary leak, there are worrisome headlines behind the hype. Specifically, people are buying more home than they can afford and they’re living on the edge. Consider that interest-only and payment-option loans are on the rise–in some areas of the country, they represent 50% or more of mortgages. These so-called “miracle mortgages” initially offer rock-bottom monthly payments–because the homeowner is either paying off interest only or has the option to choose a minimum monthly payment–and then, after a very brief period, interest rates and monthly payments skyrocket. One study revealed that blacks are 30% more likely than non-African Americans to have a payment-option mortgage. With nearly $1.5 trillion worth of adjustable-rate mortgages scheduled to set at a higher rate this year, minorities will be especially hard hit.
Results from The Ariel/Schwab Black Investor Survey, which my firm conducts each year along with Charles Schwab & Co. Inc., demonstrate that African Americans consistently favor real estate over the stock market. We tend to prefer investments we can see and touch. In fact, our 2006 survey revealed a majority of blacks, 52%, compared with just 36% of whites, rated real estate as “the best investment overall,” above stocks, bonds, and mutual funds. In 2004, 61% of African American respondents listed real estate as “the best investment overall.” Undoubtedly, buying a home is a big part of the American dream, but for a long time, redlining meant there was a sign on the door telling us to keep out. Clearly, owning a home makes a statement, and more importantly it creates a sense of security. But although you can live in it, you can’t necessarily live off it.
Just how comfortable our retirement years will be is dependent largely on our individual investment decisions. As an example, consider the staggering difference between a $150,000 investment in a home and the same amount invested in the stock market