The recent boom in housing prices has put many retirees in a great position to cash in on their home equity after leaving the working world behind. It may also be prompting people still planning their retirements to expect that their “home sweet homes” will turn out to be a sweet retirement investment.

That may not be such a sure thing. As a recent Fidelity Research Institute Report points out, the historical record shows that relying on your home to do more than house you in retirement can be risky.

Most of the country has happily watched their real estate values and their equity climb in recent years, but real estate can suffer serious and long downturns. That may be especially true if your state or region sees its major industries shut down or its economy suffer. Housing can also be subject to volatile price cycles, especially in areas that take off in a boom.

Depending on when you purchase your home and when you decide to retire, an ill-timed bust can wipe out some or all of your equity. Of course, that’s also the case with stock investments. One bad downturn can make your portfolio shrink significantly overnight.

With real estate, however, you don’t have quite the same opportunity to move your investments to a less volatile place, like gradually moving your stock and mutual fund investments into more conservative investments as you near retirement. Maybe more importantly, the report concludes, over the long run — and over the really long run — returns on residential real estate have lagged other investments.

The researchers examined two time frames. First, from 1963 through 2005, on a rolling basis over any five-year period, residential real estate returned 1.73% annually in inflation-adjusted terms. That beat out Treasury bills (1.44%), but it lagged bonds (3.18%) and stocks (5.84%).
The same proved true during that period for any 10-year time frame. Residential real estate’s real returns reached 1.62% annually. That beat Treasury bills again (1.44%) but lagged bonds (3.33%) and stocks (6.47%).

If you’re concerned that the last 40 or so years might not be a long enough horizon to see the trend fully, the researchers also looked at the really long record — all the way back to 1835. Reach that far into the past and you’ll find that residential real estate on average returned less than Treasury bills, bonds, and stocks.

Average Annual Real Returns (After Inflation)

Residential Real Estate Stocks Bonds Treasury Bills
5 Years 1.39% 6.97% 2.91% 3.01%
10 Years 1.28% 6.91% 2.75% 2.85%
20 Years 1.25% 6.67% 2.54% 2.65%
30 Years 1.36% 6.59% 2.34% 2.47%

These numbers offer a cautionary tale against relying on your home to not just house you but also feed you in retirement. If you’re thinking about moving up to a bigger and better house because of its investment potential, your retirement interests may be better served by putting your extra money into other places.

Data courtesy of the Motley Fool

It is interesting to learn who is it that is lending the US government money to cover it’s own intereste payments on it’s debt. Apparently the government owes itself the most.

As of last June (the latest complete breakdown available), the biggest holder of Treasury debt was the U.S. government itself, with about 52 percent of the total $8.5 trillion in paper that’s out there. Most of the government’s holdings are massive savings accounts for programs like Social Security and Medicare.. That’s leaves a little over $4 trillion in public hands. The biggest chunk (about 25 percent of the $8.5 trillion total) is held by foreign governments. Japan tops the list (with $644 billion), followed by China ($350 billion), United Kingdom ($239 billion) and oil exporting countries ($100 billion).

Other big holders of Treasury debt include state and local governments ($467 billion); individual investors, including brokers ($423 billion); public and private pension funds (319 billion); mutual funds ($243 billion); holders of US savings bonds ($206 billion); insurance companies ($166 billion) and banks and credit unions ($117 billion.)

With these statistics it makes one wonder about the all the rhetoric that the US is beholden financially to foreign governments. Even though it is not apparent. The biggest issue that the US has is that it is simply borrowing beyond it’s means to pay back it’s debt, especially to itself? Right now the government continues to borrow just to make payments on interest payments. The biggest threat with so much debt would be a slide in the US dollar.

Foreign investment in the U.S. – in U.S. stocks, bonds, real estate and businesses – isn’t necessarily a bad thing. Some observers point out that strong demand for U.S. investment is a sign that the U.S. is still the best place in the world to invest. What matters most is the ongoing strength of the U.S. economy and the federal government’s financial health. To the extent that Congress can control spending, eliminate the federal budget deficit and keep the economy growing, we should be fine.

But the current trends aren’t promising. At the moment, the U.S. economy is still relatively strong - both unemployment and inflation are relatively low. But growth seems to be slowing and, at some point, the economy could slide into a recession. When that happens, the economy shrinks and so do tax revenues. But Uncle Sam still has to the pay interest on what he’s borrowed - just like you don’t get a break on your mortgage payment when you lose your job. If we keep spending more and more on interest, the federal budget gets squeezed that much harder when the economy eventually stumbles.