Equities vs. real-estate

End of the housing bubble and resulting correction is encouraging sanity checks all around. CNN/Money published an interesting article comparing stocks against real-estate as investment vehicles. This is a good long-term view of the situation, undistorted by short term anomalies and irrational exuberance prevailing in the middle of the next contemporary tulip frenzy.

Bottom line in the eight-point comparison is stocks outperform in three categories (performance, cost, effort and diversification) while real-estate has the edge on three (taxes, leverage and volatility or more precisely lack thereof) and drawing on transparency. But the weighting of the categories will differ for each person and the story is more complex in each case.

Historically S&P 500 has returned around 12%, while real estate appreciated at a rate of 3.5%– barely keeping up with inflation. But the situation can easily reverse in the short term. For example, the same article cites 2001-2006 as one period where housing outperformed the broader indices:

Real estate has packed quite a punch of late, appreciating 12.4% annually between 2001 and 2006, according to the S&P/Case-Shiller U.S. Home Price index. That clobbered stock prices, which gained only 4.3% a year as measured by the S&P 500.

These 5 years saw the end of the dot-com bubble, followed by a recession, beginning of the second Gulf war and slow recovery. Real-estate continued to appreciate and prop up consumer spending with the equity built. But a different study looking at about 25 year stretch between 1978-2004 found stocks delivering better returns at 13.4% verses 8.6%. (That is arguably a more fair comparison because it includes a mix of strong growth periods including the 1980s, covering the later boom-bust cycle in technology and ending at the height of the real-estate bubble.) Another interesting data point was that REITs overall proved to be one of the better investment categories, combining the low transactional costs of stocks with a market valuation pegged to diversified property appreciation.


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