Some days bring more e-mail than others.

Immediately after publication of my column comparing the investment return of typical home ownership with a major index fund, my computer starting making noises like a broken slot machine as new e-mails announced their arrival. Then the written letters started to arrive.

No, readers declared, home ownership is not a better investment than common stocks!   You forgot about mortgage payments! What about taxes? What about insurance? What about repairs, new roofing, and replacing the carpets? What about the cost of buying and selling? When you ignore all those costs, you are misleading people, readers admonished.

  In fact, I didn't ignore those costs.

  Let's go through this slowly. And let's be keenly aware that two deeply held religious beliefs are involved--- that home ownership is good for the soul and that stocks are the only investment anyone should ever make.

Here are the basics:

When you buy a common stock your return comes in two forms, dividends and price appreciation. We haven't seen much in dividends recently but over the long-term dividend yield has accounted for nearly half of the total return on common stocks.

The return on home ownership also has two forms. One is the shelter service we receive. It isn't cash. We never see it. It's what economists call "imputed income." (For a column discussing imputed income and home ownership in more detail, see But we would have to pay rent if someone else owned the house. The other form of return is price appreciation.

We have a choice of how we receive our investment return when we buy a house.

•           Here's one extreme. You buy a house for cash and enjoy years of                income in shelter services.   You also get price appreciation.                From 1970 through 2001 the compound rate of appreciation for the                median resale priced home in the United States was 6.18 percent.                Using an old rule of thumb about home rental values--- that a                house rents for 12 percent of its market value--- the after                insurance, taxes and maintenance return is an additional 8                percent or so. That's a total return of 14 percent, entirely                tax-free. The return on common stocks over the same period was                12 percent, taxable. A comparison that ignores the possible                service return component of ownership is somewhat like omitting                the dividend yield on common stocks when talking about stock                returns.

•           Here's the other extreme, which is what most of us do. You buy                a house with a mortgage. Your income in shelter services is                replaced by the cost of   'renting' the mortgage money. The                greater the amount borrowed, the greater the displacement of                imputed income by the cost of financing. Over the same period,                a 20 percent down payment resulted in a compound annual return                of 11.84 percent. A 10 percent down payment resulted in a 14.36                percent return. Both returns were entirely tax-free. Both returns                were better than the return on common stocks.

The remaining issue is whether the financing cost is greater than, or less than, the rental service income. If you assume the rental value of a house is 12 percent of its market value and that taxes, insurance, and maintenance take 4 percent, the net return would be 8 percent. As a practical matter, I think the old rule of thumb is on the high side. I feel more comfortable with an after taxes, insurance, and maintenance return of 6 percent. It should also be recalled that this return isn't fixed--- the rental value of a house rises with price appreciation.

Does this mean you can't lose money owning a house?

Absolutely not.   There are lots of ways to lose money on home ownership. If you sell too soon, selling costs will absorb your profit. You can buy the wrong house at a good time. You can buy the right house at the wrong time. Or the wrong place. You can lose your job and be forced to sell. A divorce can create a forced sale. You can over-improve the house, as many do. You can be burdened with a fetish for fuchsia walls that is not shared by most homebuyers. It's a long, long list.

Common stock ownership has similar pitfalls, as many have discovered.

The fact that our economy has continued relatively strong is evidence that returns on home ownership have been high. Without strong returns, no one would be in a position to refinance and take cash out.

Finally, this is not an all or none deal.

Home ownership and stock ownership are not mutually exclusive. I would not sell my house to increase my investment in common stocks. Now would I buy so much house that I couldn't afford to invest in equities.