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Your Home Investment Has Returned Zero in 10 Years

NEW YORK (TheStreet) -- Here's a sobering fact for anyone who clings to the idea a home is a great investment: With the big gains of the past couple of years, the average U.S. home is now worth what it was in 2004. In other words, as investments, homes have returned zero in 10 years.

By comparison, stocks have been terrific. Despite the huge selloff during the financial crisis, the Standard & Poor's 500 has gained about 106% over the past 10 years, assuming all dividends were reinvested.

The dreary facts on long-term home prices, contained in this month's S&P/Case-Shiller Home Price Indices, is accompanied by data showing that recent home price gains are slowing.

"Although home prices rose in April, the annual gains weakened," said David M. Blitzer, chairman of the index committee at S&P Dow Jones Indices. "Overall, prices are rising month to month, but at a slower rate. Last year some Sunbelt cities were seeing year-over-year numbers close to 30%, now all are below 20%: Las Vegas (18.8%), Los Angeles (14.0%), Phoenix, Ariz. (9.8%), San Diego (15.3%) and San Francisco (18.2%). Other cities around the nation are also experiencing slower price increases."

Also see: Fewer Cash Home Sales Is a Good Sign

In the 20 largest metropolitan areas, home prices gained 10.8% in the year ended in April. Though the average home price has gone up about 25% in the past couple of years, it remains nearly 20% blow the peak in 2006.

Short-term jumps in home prices benefit speculators who are free to flip a property when they think the big gains are ending. But ordinary homeowners are generally more concerned with long-term trends, because they don't sell until they're ready to trade up or downsize, or to move for a new job or retirement.

It's a fair bet, then, that flat home values over the past decade help account for today's sluggish housing market. People just don't want to amass hundreds of thousands of dollars of debt for a home that won't grow in value. Over the long term, home prices tend to rise at 3% to 4% a year, just over the inflation rate. In the past decade, flat prices mean homes have lost value when inflation is taken into account.

Still, everyone needs a place to live. How do the dismal home price returns affect the choice, today, of buying versus renting?

Many people who rented over the past decade may be patting themselves on the back. By not buying, they avoided tying up a lot of money in a down payment. And by renting, they were free to move when they wanted or needed to.

As rule of thumb, buying makes sense only if you'll stay in the home long enough for price gains to offset the costs of buying and selling -- transfer taxes, legal fees, inspections, Realtor's commission, etc. By that standard, it might look like anyone confronted with the buy-versus-rent choice in 2004 would have been better off renting.

Also see: How Stagnant Wages Have Trapped the Housing Market

While that may be true, it doesn't hold that renting would be the best option today. After all, home prices, though slowing, are continuing to rise. A 10.8% gain from April 2013 to April 2014 would be enough to cover most of those buying and selling costs, if not all. Even if price gains were to drop to the mid-single digits, you could break even on a home in two or three years, which isn't bad.

Remember, too, that the bad experience of the past decade was unprecedented. Many of the conditions that caused the home-price bubble, such as easy money and irrational exuberance, don't exist today.

It may take several more years, but the housing market appears to be returning to normal. That means that buying a home is probably a better option than renting so long as you plan to stay put for four or five years.

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