A recent Gallup survey on expected future returns of asset prices shows that most Americans still think that owning a home is the best way to generate a high return in the future. Nothing could be further from the truth! It just shows how totally out of touch with reality the average American is.
So says Cullen Roche (pragcap.com) in edited excerpts from his original article* entitled Still Buying the (Golden) American Dream.
The following article is presented by Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and the FREE Market Intelligence Report newsletter (sample here; register here) and has been edited, abridged and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.
Look at the graph below from the Gallup survey**. The figures show that Americans, on average, think that the top two long-term investment assets are gold and real estate – but the facts state otherwise.
According to the U.S. Census Bureau Survey of Constructionsingle family real estate generates a 0.74% annual return over the last 30 years. This figure includes multiple housing booms, mind you, so the data is probably much lower if we go further back in time and, as such, there appears to be some recency bias here despite the housing bust and this doesn’t even account for many of the miscellaneous costs involved in real estate.
As I’ve shown previously, a house is basically a depreciating asset that comes with an appreciating piece of land – but that depreciating asset is extremely expensive over its lifetime. When you calculate the total costs that go into maintaining this asset the returns are very likely to be negative over long periods of time so that 0.74% figure is probably higher than you should really expect. In fact, the returns from stocks and bonds trump real estate by a healthy margin so Americans have this one totally backwards – the American Dream isn’t quite the dream we have been sold.
Gold is more interesting. If you look at the long-term returns of gold in the post-Bretton Woods era, the real returns are pretty substantial at 7.8% which is not much below stocks at 8.4%, but substantially higher than T-bonds at 3.2% and higher than the aggregate bond index at 5.4%. This is interesting when you consider that gold is really just a commodity and commodities don’t tend to generate real returns over the long-term.
I’ve surmised that gold has a “faith put” in its price due to the currency belief. Whether that can last over the long-term is dubious in my view so I wouldn’t be surprised if that view turns out to be wrong as well.[Editor’s Note: Below are excerpts from the Gallop article referenced above:
Lower-Income Americans the Only Subgroup to Favor Gold
Lower-income Americans, those living in households with less than $30,000 in annual income, are the most likely of all income groups to say gold is the best long-term investment choice, at 31%. Upper-income Americans are the least likely to name gold, at 18%.
Upper-income Americans are much more likely to say real estate and stocks are the best investment, possibly because of their experience with these types of investments. Upper-income Americans are most likely to say they own their home [Does that mean mortgage-free? If not they do not yet actually own their home outright. The bank still does.] at 87%, followed by middle (66%) and lower-income Americans (36%). Gallup found that homeowners (33%) are slightly more likely than renters (24%) to say real estate is the best choice for long-term investments.
Stock investors are also more likely to favor stocks as the best long-term investment; 34% of them say that stocks are the best option compared with 13% of Americans who don’t own stocks. Upper-income Americans are again the most likely to own stocks (82%), followed by middle-(57%) and lower-income Americans (16%).]
Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
*http://pragcap.com/still-buying-the-golden-american-dream (Copyright © 2014 All Rights Reserved)
** http://www.gallup.com/poll/168554/americans-sold-real-estate-best-long-term-investment.aspx (Copyright © 2014 Gallup, Inc. All rights reserved.)