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Wall Street Steward Blog

The Housing Farce

“I only buy real estate because it is REAL.”
“They aren’t making any more land.”
“I can feel it, touch it, see it, so I know it has value.”
“People with real money buy real estate.”

I have heard them all.  There are elements of truth in some of these statements, but there is a lot of hot air as well.  Shall we examine how real estate has performed over time using the truth serum of data?

Yes, we shall.

All of this data comes from Robert Shiller, and can be referenced here.  These points are talking specifically about residential housing prices.  Not commercial, not rental houses, not how one can make money using leverage, which I explained here.

  1. Since 1970, real estate has lost money 7 times over a calendar year (’90, ’06, ’07, ’08, ’09, ’10, ’11)
  2. Since 1970, real estate has had an average annual return of 4.79%
  3. Since 1970, inflation has averaged 4.26% per year
  4. So, on average, your home appreciation has beat inflation by .53% per year

Is that a good investment? You live inside of an inflation box – congrats.  Don’t feel bad, I live in one too!

Just for comparison purposes, lets take a look at how the big, bad stock market performed over the same time frame.  I will use the S&P 500, which is considered the best barometer of such returns.

  1. Since 1970, the stock market lost money 9 times over a calendar year (’73, ’74, ’77, ’81, ’90, ’00, ’01, ’02, ’08)
  2. Since 1970, the stock market has had an average annual return of 10.42%
  3. Since 1970, inflation has STILL averaged 4.26% per year
  4. So, on average, the stock market has beat inflation by 6.16% per year

I will pose the same question….is that a good investment?

“No further questions, your honor, the prosecution rests.”

I think real estate is still a good investment, despite these facts.  However, I don’t feel this way because of the monstrous returns your house has generated, but rather the behavior patterns it allows.  See, people LIVE in their homes, so they do not think about the price movements, trends, etc…..Also, people tend to hold their house for a long period of time.  This is not the case with the stock market – clients receive monthly statements showing the value of their portfolio, and this causes them to make bad decisions and think short term.  Worse yet, they can check their account values online second by second.

What if there were a 24-7 real estate channel that listed the prices of every house on your street?

“Mr Jones, your neighbor’s dog just defecated on your lawn, you just lost 3 grand.”
“The city installed curbs and gutters, increasing your house by 17k!”
“There was a foreclosure down the street, which lowers everyone’s property value by 6k.”

You get the point, right?  There is no CNBC for real estate.  Therefore, people usually do not panic.  They ignore the ups and downs, live in their home, and hold it for a long time.  AND… still just keeps up with inflation. If you applied those same principles to your portfolio, you could afford to own multiple homes that will barely keep pace with inflation.

For THAT reason, I feel as though real estate is a good investment.  It allows people to do the right thing!  Just don’t come at me and tell me that it is a better investment than the stock market.  You lost that case already.