Despite Real Estate Boom, Stocks Still King

Here’s a pop quiz:

By how much has the domestic residential real estate market outperformed the S&P 500 index over the past three years?

The U. S. real estate market has seen its biggest boom in history in recent years. Investors who have moved away from the stock market and shifted their assets into housing are probably very happy they made such a move. But should they be? It depends, but the numbers themselves tell an interesting story.

Since 2003, residential housing prices in the U.S. have risen by 10 percent per year. In fact, the annual returns have been accelerating, 7% in 2003, 11% in 2004, and 12% in 2005. Despite such a strong market, investors in the stock market have actually done even better, as the S&P 500 has advanced 13% per year during the same period.

If a huge housing boom can’t even match the stock market’s performance, it serves as yet another quantitative example of why equities have outperformed real estate by a factor of three throughout history.

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3 Thoughts on “Despite Real Estate Boom, Stocks Still King

  1. NO DooDahs on December 22, 2005 at 11:00 AM said:

    FWIW – generally I agree with your thesis, that equities are the place to be long-term. It’s possible to find counter-examples of long time periods where other investments, like gold or treasuries or real estate, outperformed stocks, though.

    But I don’t feel your comparison is apples to apples. A real estate investor gets not only appreciation from market value, but also positive cash flow from rents, and a tax benefit from accumulated depreciation that can be funneled into other properties through tax-free exchanges, and finally converted into a primary residence and sold tax-free under current law (provided certain time constraints are followed). Simply comparing appreciation is not enough. The tax benefits of real estate must be accounted for in an honest comparison.

  2. Chad Brand on December 22, 2005 at 11:18 AM said:

    This was not supposed to be an in-depth analysis. However, stock market investors also do not make money only through market value appreciation. There is additional income from dividend reinvestment and other means (writing covered calls, etc) that can be significant.

    The appreciation comparison is more apt for the stock market investor who sold their stocks after the bear market and bought another house, for vacation purposes or whatnot, or added on to their existing home. They would be mostly focused on appreciation.

    A full time real estate investor who buys properties to rent out, or fixes them up and resells them would surely not be in this group. However, they represent a very small portion of the population, compared with those who simply fled the market and instead opted for some basic real estate related investments.

    Finally, research has shown that over the long term (20 years or more), and after adjusting for inflation, equities outperform all other asset classes (bonds, cash, gold, and real estate), with less risk.

  3. Jack Miller on December 23, 2005 at 10:58 AM said:

    The big factor in favor of real estate is the leverage involved. Folks get wonderfully low (after tax) financing, hold through the ups and downs of the market cycle and realize much higher total return on equity than what they typically earn on stocks. You must remember that, while 10% of the people out-perform the stock averages by large margins, 70% under-perform the averages by large margins. Those who buy a house on margin and live there for many years actually receive the market average. The return on equity can easily be 3 times as high as the return on assets and thus can easily beat the average return received by the average investor.

    You probably know of the study that shows the efficient frontier of investing over 30 years is 180% long stocks and 80% short bonds. Those who purchase a house on the highest margin available, invest the rest in stocks come reasonably close to reaching the efficient frontier.

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