Great article debunking the house apppreciation arguement

[Wiley]

Pretty interesting read. Gives a little longer perspective on whether homes really appreciate over the long term.

http://prudentbear.com/articles/show/130

[Diego Mamani]

Thank you for the link!

Unfortunately, the opening paragraph uses rents as a proxy for house prices. As we know, the two can diverge widely even in the medium term. For instance, monthly rents historically used to be a little under 1% of a property’s market value. At the peak of the housing boom in 2005, however, in places like coastal So. Cal., monthly rents were less than one third of 1% of the property value!

The article’s author had no better choice, as house pricing data is hard to come by. Professor Shiller does have a chart with house prices going back to the 1890s, which shows that in the long run, the stock market is a far better investment.

[surveyor]

….

the stock market is a far better investment

Well, now, I wouldn’t say that… And certainly it’s not been my experience…

[Daniel]

Diego,

Total long-term returns for both stock market and real estate are actually very similar (about 10% nominal, or 7% real). For stocks, the total return is capital gains plus dividends, and for real estate is capital gains plus rental income minus expenses (insurance, maintenance, etc). Rental income could be actual rental income (someone is paying you money to live in your house), or “owner’s equivalent rent” (money you don’t have to pay to someone else because you live in your own house).

The well-known argument that housing “only appreciates 1%/year”, although factually correct, is quite misleading and incomplete. Yes, empty housing only returns 1%/year (probably negative if expenses are factored in), but that’s not the point of real estate, is it now? Hotels wouldn’t be very good investments if they sat empty, right? Historically, rental income delivers most of the returns for real estate, while capital gains usually return much less.

Naturally, since San Diego rental yelds are very low now, it means that local real estate is overpriced. But I guess that’s not news to you or anybody else here.

Finally, there are many differences between stocks and real estate investments (liquidity, leverage, minimum investment required, and tax treatment), and it is true that these can influence actual returns a lot. I agree with you, for regular folks stocks are a far easier investment, because they’re liquid and can also be bought a little at a time.

Daniel

[SHILOH]

In recent years, financial info and trading on the Net has made information available to everyone if they know how to use it. A friend of mine’s husband trades online and made a lot of extra $ trading big companies like Home Depot or Qualcomm. That was over the past 3 years or so. He told me he would have doubled $100K in one year, but she kept on spending everytime he made a profit–so the account hovered over the initial deposit. The profit was money turned to cash and spent on improvements.

By contrast, I’ve had some mutual funds that grew minisculy since 1995. I put them in growth rather than an index because supposedly that was my best strategy. But unless one is saavy at choosing a fund, like me you can end up with duds. There are some I have seen that performed up to 32%. I was hoping to average 8%…but basically earned less than what I could have in a CD. I think it’s difficult for an amateur to maximize their investment unless they are lucky.

I am an amateur, but it seems to me from my experience so far that if you are a very smart investor, real estate appreciation as an investment is less lucrative than stocks. If you watch the stock market all the time and know how to invest, you can achieve higher gains faster. Most people are amateurs and are too busy just living life to constantly be watching what their stocks or mutual funds are doing…and it there goes time and money if you don’t stay on it.

[one_muggle]

Simple index funds tend to beat the overall nationwide RE market over the long term. Of course individual stocks and individual RE markets can significantly beat or lag–the trick is getting in on those leaders early. IMHO one may spend time watching and learning about any market (RE, stocks, bonds) and beat the averages–again, this is usually over long periods of time.

I think the fundamental reason the stock market (broad index funds) should beat the broad RE market over time is that selling/buying (as opposed to developing) existing RE is typically zero sum. Wealth is transferred in the transaction, not truly created. Microsoft (love em or don’t) has helped make businesses more productive, and has helped to create entirely new industries. Overspeculation aside, which happens in stocks as well as RE, a share in Microsoft is worth more now than when first issued because the company has created value.
-one muggle

[Anonymous]

rla
Real estate investment returns in many markets of the US has far surpassed returns of the stock market. Leverage is the key to maxomizing returns. If you bought in 1997 or prior to that, sold in 03,04,05,06 in most areas of Calif with 10,000 down your rate of return would range from 2000% to 4000%. Even if prices drop to 2002 or 03 levels still an unbelievable rate of return. Buying today makes no financial sense in these same markets but the opportunities will come around within 3-5 years. There are individual stocks and professional traders that may have performed that well but not generally.

[blahblahblah]

No matter the investment it all comes down to timing. The only difference with real estate is that it is easier for Joe McAverage to apply huge amounts of leverage.

[sdrealtor]

Right on Concho,
If you compare returns on the value of the house the return might be lower but when you factor in your actual return based upon your investment (i.e. down payment) not to mention it provides a place to live, I suspect you would find differently. I put 20% down on my current home, while it has appreciated over 100% in value my investment has returned over 500% and my monthly nut is less than I could rent it for.

[one_muggle]

RLA: I agree, except that you cherry picked the best time in history for RE(at least modern times) and one of the best locations. What I compared were the national housing market to stock indexes for the very reason CONCHO points out–Timing is everything.
But that really applies most for short-term investing in either RE or stocks. I can find several examples of stock gains that blow away even the recent SoCal RE gains, even with leveraging. But that is with perfect hindsight–I would take perfect hindsight in investing over any other method–Just ask the CEO’s that have been nailed backdating options!
I don’t espouse stocks over RE for investing. But stocks carry only their cost as a liability–not so for houses. The stock market taken as a whole has beaten the RE market -as a whole- over ANY 20 year period in history. I agree that one may use massive leveraging in RE, but one can leverage to buy stocks as well–some in straightforward ways, such as leveraged stock accounts, and some in stupid ways like I saw in the 90’s. I knew otherwise intelligent people who maxed out their credit cards and took out home loans to buy tech stocks… ouch. Leverage in stocks became much more regulated after the huge market crashes in decades past. I wonder if we will see any measures taken on RE leveraging if this bubble turns out as bad as some of the real bears have been predicting. I doubt it.

And as far as Joe Average–True, it is easier for him to leverage to buy a house. But I really think Mr. Average is much safer and better off plunking down a few hundred bucks per month on an index fund (which dollar cost averages) as an investment rather than RE (your own home is a different calculus). The index, unlike a single stock, will not go to zero, you can buy (almost) as little or as much as you want for <$10/trade, and sell it just as fast, your fund will never have a leaky roof, termites, balloon payments, lack of renters or a 6% commission to sell. With that said, a savvy investor can make money in either RE or stocks. But Mr. Average is rarely that savvy, just lucky that RE has gone up or flat for a decade. I doubt Mr. Average is prepared for a major RE swing down. Leverage works both ways and it is not as easy to go bankrupt now as it was in the early 90's due to recently passed legislation. Cute timing on their part, don't you think? -one muggle

[Anonymous]

rla
Your point is well taken but consider this. One does not invest in the entire US real estate market therefore local and regional analysis can be effective when choosing real estate investment opportunities. Second, I did not cherry pick purposely. I just did not take the time to go back twenty years. If you want to go back to 1986, I was investing in properties with nothing down and owner carryback financing. Prices for a 1400 sq. ft. 3 br 2 ba on a 7000 sq ft lot sold for 120 to 125 K. They have since appreciated to 450K on average. Also they are paid in full because the tenants paid off the mortgage for me over that time. So with approximately 22,000 invested over time (which includes vacancies, repairs etc.) I have a positive cash flow of 1,100 per month after expenses for as long as there is a tenant available. (assuming the economy does not fall off the earth). So you calculate the rate of return. Is it at least competitive with your stock portfolio? There are lots of ways to make great returns on investment. I am sharing what I know and I appreciate learning what you know. For a simple guy like me though I figured out that If I could borrow 5 million dollars and have tenants pay it off for me that as soon as they were done I would get the 5 million (plus appreciation if any) and the cash flow that the asset produced. Worked for me

[surveyor]

history

The stock market taken as a whole has beaten the RE market -as a whole- over ANY 20 year period in history.

When this statement is uttered, it is with certain qualifications. For one thing, it does not take into account the tax deductions that the real estate market provides, and it also does not usually include the cash flow that a rental property provides. For the stock market to make a more equivalent analyses of returns for itself and the real estate market, it has to either account for the cash flow and tax deductions or eliminate the use of dividends in its returns calculations.

[Author]

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