Lying With Statistics – Part II

As I promised in part I of this series there is plenty to write about regarding how the real estate industry uses statistics to propagate lies and myths. Today I’d like to call your attention to an NAR sponsored Web site:, the goal of which is to talk up the real estate market. Nothing like an unbiased source of information.

Here are some of the “facts” found on this Web site:

More than three-quarters of all recent buyers believed their home purchase was at least as good as an investment in stocks. So…when three-quarters of the world thought the world was flat that made it true? It is incredible that they can even publish such a statistic. In the last 10 years this belief was probably justified but in the long run it’s simply fantasy. As I’ve pointed out before, in the long run, after adjusting for inflation, housing has had a zero return.

According to the 2007 NAR Profile of Home Buyers and Seller, first-time home buyers made a median down payment of 2 percent, while repeat buyers who financed their purchase put 16 percent down, indicating the wealth-building effect of homeownership. Well it’s bad enough that they even report this statistic in the first place but it’s really sleazy to add in their own, highly-suspect conclusion at the end of the sentence. In all likelihood the higher down payment has nothing to do with the wealth building effect of homeownership. It has everything to do with the forced savings of monthly mortgage payments and the fact that repeat buyers are older and more successful for other reasons. Do you think that maybe upwardly mobile consumers are more likely to move around?

Homeowners benefit from the power of leverage. Over 10 years, a $10,000 investment in the stock market at a normal 10 percent market rate of return would yield $23,600. The same investment as a down payment on a $200,000 home at a normal appreciation rate of 5% would return nearly 5 times the stock market return, at $110,300. Oh….my….God. This thing is wrong on so many levels I don’t know where to begin.

  1. Their math is wrong, though directionally correct. The stock market return under their assumptions would be almost $26,000 and the return on the home would be almost $136,000.
  2. 5% annual home appreciation is way too generous so there is nothing “normal” about it. For instance, for the 10 year period beginning in January 1987 the average appreciation for the 10 city composite in the Case-Shiller index was only 2.2%. At that rate the $10,000 down payment in their example only returns a bit under $59,000.
  3. They are assuming 20 x leverage (5% down). You can leverage your stock investments as well and if you use 20 x leverage then that stock return would be almost $329,000.
  4. Of course, using 20 x leverage is just not smart. It cuts both ways. If your investment goes down by 5% you are wiped out. That’s sort of what happened to people in the last couple of years.

I’ll save the rest for part III.

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