The old saying is that, “there’s no place like home.” Yet from my view, there is simply no place like the stock market. When it comes to retirement planning, it is hard to make a better long-term investment. According to research by Edward Jones, over the last 20 years, the average U.S. home price has appreciated about 5.5% per year versus an 11.4% yearly increase in the S&P 500, a broad market index of large U.S. companies.
The wide gap in returns may seem hard to believe given recent history when real estate has been so red hot. Home prices in some markets jumped more than 25% in just a year’s time and stories of bidding wars were not uncommon. Of course, all of this exuberance was fueled by historically low mortgage rates and creative financing.
But when things seem too good to be true, they usually are. I fear the easy money that put the air in the housing bubble is going to leave a lot of people strapped–particularly in our community.
Whether you believe the real estate bubble is about to burst or that it is suffering a temporary leak, there are worrisome headlines behind the hype. Specifically, people are buying more home than they can afford and they’re living on the edge. Consider that interest-only and payment-option loans are on the rise–in some areas of the country, they represent 50% or more of mortgages. These so-called “miracle mortgages” initially offer rock-bottom monthly payments–because the homeowner is either paying off interest only or has the option to choose a minimum monthly payment–and then, after a very brief period, interest rates and monthly payments skyrocket. One study revealed that blacks are 30% more likely than non-African Americans to have a payment-option mortgage. With nearly $1.5 trillion worth of adjustable-rate mortgages scheduled to set at a higher rate this year, minorities will be especially hard hit.Results from The Ariel/Schwab Black Investor Survey, which my firm conducts each year along with Charles Schwab & Co. Inc., demonstrate that African Americans consistently favor real estate over the stock market. We tend to prefer investments we can see and touch. In fact, our 2006 survey revealed a majority of blacks, 52%, compared with just 36% of whites, rated real estate as “the best investment overall,” above stocks, bonds, and mutual funds. In 2004, 61% of African American respondents listed real estate as “the best investment overall.” Undoubtedly, buying a home is a big part of the American dream, but for a long time, redlining meant there was a sign on the door telling us to keep out. Clearly, owning a home makes a statement, and more importantly it creates a sense of security. But although you can live in it, you can’t necessarily live off it.
Just how comfortable our retirement years will be is dependent largely on our individual investment decisions. As an example, consider the staggering difference between a $150,000 investment in a home and the same amount invested in the s
tock market for 20 years at the historical rates of return of 5.5% and 11.4%. The real estate investment grows to $438,000, while the stock market investment balloons to $1.3 million–a difference of close to a million dollars.After making such great strides in terms of breaking into the middle and upper classes, I worry that too many of us will retire into poverty simply because we did not save enough through stock market investments. There’s definitely a basis for this concern. Last year, only 64% of African American respondents to our survey identified themselves as stock market investors, compared with 83% of whites.
Even more startling is the size of the savings gap. On average, African Americans with at least $50,000 in household income have $59,000 earmarked for retirement while whites at the same income level have socked away closer to $93,000. At a glance this difference may not seem alarming, but over time, with compounding, it becomes a gaping hole.
Not only do African Americans invest less, but our community often makes conservative choices, such as savings accounts and money market funds, that offer much lower returns than the stock market. So assuming blacks invest conservatively for 25 years, with an annual return of about 4%, the $59,000 retirement account noted above will grow to $157,000. By contrast, whites who invest $93,000 in mutual funds at an annual return of 8% over 25 years would end up with a retirement account closer to $637,000. That is a difference of $480,000. As you can see, this is not a story that gets better with time.
I know many members of our community steer clear of Wall Street because of the perception that the stock market is risky, but I am convinced the biggest risk of all is not taking one. To be clear, I am in no way recommending that people forego homeownership–but it should not be the anchor of a retirement plan.
Mellody Hobson is the president of Ariel Capital Management L.L.C./Ariel Mutual Funds, a Chicago-based mutual fund company and money management firm. She is also a regular financial contributor for ABC’s Good Morning America.
To download the 2006 Black Investor Survey, visit www.arielmutualfunds.com or www.aboutschwab.com.