Statistics show that housing on the whole is a relatively tame investment:
- Average annual percent change: 3.1%
- Number of years positive: 15
- Number of years negative: 5
- Number of years between 0 and 10% positive: 13.
- Number of years more than 20 percent positive: 0
- Number of years more than 20 percent negative: 0
[Housing is thus an example of low volatility investment, with a tame and steady 3.1% annual gain with 15 positive years out of 20 and no 20% annual fluctuations. Also, you get to live in it.]
Two caveats.
Caveat number one is: the price of a house is very large. So a 5% (or $10,000) move on a $200,000 asset is significant and a 20% (or $40,000) move is gigantic. Volatility as a percentage should naturally attenuate as the base of an index rises. Sometimes the opposite happens when bubbles go into correction.
The second caveat is: leverage magnifies volatility. Suppose you buy a $200,000 house and that you, like most others do, borrowed 80% of the value. Your equity is $40,000. A 5% or $10,000 price decrease now translates into a 25% ($10,000/$40,000) change. [The mathematics: if your equity is only a fifth of the asset value, you must multiply the volatility figures by 5x.]
Here are the housing volatility figures, this time assuming an 80% mortgage:
- Average annual percent change: 15.5%
- Number of years positive: 15
- Number of years negative: 5
- Number of years between 0 and 10% positive: 2
- Number of years more than 20% positive: 10
- Number of years more than 20% negative: 2
Note especially the decline in the number of years between 0 and 10 percent positive: from 13 to 2. Looked at it in this light, housing is a volatile investment indeed, at least for most people.
[Remember too the impact of leverage on volatility. This comes into play, too, when looking at companies to invest in. If they've borrowed a lot of to finance the business, that, too, can lead to higher volatility.]
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