Report Finds Home Values Underperform Other Assets

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Don't count on home equity to come through with a significant portion of retirement funding, cautions a new report by Fidelity Investments.
According to the study, home values underperformed stocks and bonds over every five- and 10-year period from 1963 to 2005. Home values have been slightly above the returns on treasury bills during the same time, according to the report, "The Equity You Live In: The Home as a Retirement Savings and


Don't count on home equity to come through with a significant portion of retirement funding, cautions a new report by Fidelity Investments.

According to the study, home values underperformed stocks and bonds over every five- and 10-year period from 1963 to 2005. Home values have been slightly above the returns on treasury bills during the same time, according to the report, "The Equity You Live In: The Home as a Retirement Savings and Income Option."

"When we started the work, the real question was: If I have home equity, how should I think about using it in retirement," said Guy L. Patton, executive director of the Fidelity Research Institute. "The conclusion: The returns on residential real estate are probably less than what most people think they are."

Over the more than 40-year period, real compound returns on stocks outpaced that of residential real estate, according to the study, with 5.95 percent average annual returns on stocks compared with 1.35 percent in realty. A dollar invested in stocks in 1963 would have compounded to $12.36 by 2006, while the same dollar would have grown to $1.79 in real estate.

The median price of new homes in the United States has risen since the early 1970s, with an average annual appreciation rate of 5.9 percent since 1963. But there have also been sharp corrections three times during the time period. It's one thing if the homeowner is able to "ride out" the sharp downturns; it's another if they're considering the home as a potential retirement asset in the near future, the report said.

That said, for many Americans in or approaching retirement, home equity is the largest nonpension asset they can draw on for lifelong income, the report said. And there are plenty of Americans who plan to -- and perhaps need to -- tap their home equity in retirement, according to an accompanying survey of more than 1,400 retirees and preretirees.

About one in five of those between the ages of 55 and 75 have used or plan to use equity in their home to help fund retirement, according to the survey. The survey also found that two-fifths of retirees moved after they retired and 15 percent plan to move. Twenty-three percent of preretirees plan to move, and another 29 percent are unsure if they will.

Thirty-five percent of preretirees believe their reason for moving will be to access home equity, while only 10 percent of retirees are motivated by equity. Thirty-one percent of retirees received more than they thought they would when they sold their home and relocated, while 23 percent earned less than they expected.

Eight percent of retirees who leveraged their home equity used a reverse mortgage to do so, the survey found.

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