Posted on 05/08/2007 11:45:49 AM PDT by SirLinksalot
Round 1
Performance
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.
But over the long run stocks win easily. A new study by Jack Clark Francis, a finance and economics professor at Baruch College in New York City, and Yale's Roger G. Ibbotson compared the annual returns of real estate from 1978 to 2004 compared with those of 15 different "paper" investments, including stocks, bonds, commodities futures, mortgage securities and real estate investment trusts (REITs).
The results? Housing delivered a solid but unimpressive annualized return of 8.6%. Commercial property did better at 9.5%. The S&P, however, delivered a crushing 13.4%.
Other studies argue that real estate's returns are much worse. Yale finance and economics professor Robert Shiller, author of Irrational Exuberance, who looked back to 1890, contends that only twice has real estate produced truly outstanding returns: after World War II, when returning troops were starting their families, and from 1998 to 2005, a period he thinks is a bubble.
Housing's rate of return, he argues, has to trend back to the mean of about 3% a year - barely above the inflation rate. If that's starting to happen now, he says, we could be facing many years of losses.
Before you decide that real estate is already down for the count, though, consider this: Equity REITs, which own stakes in commercial properties, were among the best performers in the Francis-Ibbotson study, with annual returns of 14.8%. But REITs are stocks, after all.
Round 2
Leverage
Real estate partisans reply that these academic studies leave out the asset's strongest advantage: leverage...
(Excerpt) Read more at money.cnn.com ...
The Article uses 8 Criteria for evaluating Stocks vs. Real Estate. Here they are :
Performance
Leverage
Costs
Taxes
Transparency
Effort
Volatility
Diversification
Read the rest of the article for their analysis. But here is how they conclude it :
Decision
Stocks win the bout four rounds to three, with one round a draw. But the fight is in truth considerably more lopsided.
Stocks roll up large margins of victory in performance, costs, diversification and effort you need to expend as an investor.
Real estate’s only big win is in leverage. Using that leverage to buy a home you can afford makes sense. You’re building equity and collecting other benefits as well. (And no landlord can stop you from owning a big, hairy dog or throwing a party for 200 of your noisiest friends.)
But jumping into the real estate ring thinking you’ll use others’ money to score an investing knockout is plenty risky. And the big prize, as you may have noticed if you’ve tried to flip a condo lately, is more elusive than it might have seemed.
Stocks roll up large margins of victory in performance, costs, diversification and effort you need to expend as an investor.
Real Estate is not for everyone...
Here’s another view of the Stocks vs Real Estate debate :
http://www.lazymanandmoney.com/stocks-vs-real-estate/
(they have a table on that page which I cannot post here that compares stocks vs real estate year by year performance ) :
May’s Money Magazine tries to answer the Stocks vs. Real Estate question (see page 94). I had thought that real estate was going to come out the big winner. I know that real estate has been really popular of late, but I had it as the favorite due to the value of leverage.
Money Magazine declared stocks the winner, but I think they glossed over the leverage factor. For one they took a 2 year time-line for the real estate and then deducted a lot of one-time costs. That didn’t seem to be a particularly fair shake to me. So to the left you’ll see my attempt at the running the numbers in Excel. In the example, I assume the investor has $40K to put to work. For stocks, I assume a 10% (for better or worse) gain. I also took a cue from my early physics classes and ignored friction - in this case it’s the cost of buying stocks. The Real Estate column assumes the investor puts 20% down allowing them to buy a $200K home and pays 10K in closing costs (closing costs from the article). The Real Estate AC (after costs) factors in a 6% sales commission (though I believe this can be less), paying off of the mortgage, $3,600 in preparing the house for the sale (gleaned from Money Magazine), plus the original 40K investment.
I’m not 100% that my chart is accurate. I’ve edited it a few different times realizing a couple of errors. However, each of the charts showed the same trend. Real estate seems to out perform in the short term, but at some point in the 25-30 year mark the 10% return of stocks takes over the leverage of real estate. However, if one were to lock in the gains of real estate at year 8 (around $125K), the person could use the gains to buy three more $200K homes getting more an more leverage. Leverage can be a dangerous thing as a loss can spiral just as much in the negative direction. It still makes me think that there are a lot of gains to be had in real estate in general.
If you are planning to execute on this plan, remember that it’s not a get rich quick scheme. In today’s real estate market, I believe you should be prepared to hold onto a home for a minimum of 6 years (while being prepared to hold for 10 years). Trying to fix up and flip a home within a year opens you up to short term price pressures and fixed costs. You should also be aware of other factors mentioned in the Money Magazine article apply. One such important one to remember is that a home is not a very diverse investment. Another one is that real estate investing takes a lot of work, while investing in stocks is relatively quick and easy.
Why didn’t they interview Hillary about this question? She diversified successfully into commodities and could provide some help for all the little people trying to improve the return on their meager portfolios.
She stole it!
Long term, Real Estate is a safe hedge.. but generally and historically it is not going to beat stocks long term.
Only way it does is if it is revenue generating real estate, such as rental property. Buying a piece of land, to sell it years later for a profit, is basically an inflation hedge, nothing more.
Leave out leverage?
Hillary Clinton, a known expert in this area, recommends cattle futures.
They forgot a VERy important difference that must be included....liquidity.
If they are looking at the primary residence as the RE investment do they take into account the monthly savings of not renting and the tax deductions of mtge interest?
If they are looking at rental properties as the RE investment do they take into account net revenues from the rents? Example...one of my properties was purchased in 1985 for $103K. I could sell it today for triple that easily. But for the past ten years I have owned it free and clear and received an average over that decade of $12k/year in net revenues ($19k in 2006) plus the deductions for upkeep, insurance and even mileage for trips to inspect it.
Put your money in TAXES. They are sure to go up.
Yes. Liquidity should have been another factor.
Other articles appearing on various papers around the country seem to agree also.
See here :
http://www.azcentral.com/business/columns/articles/0429biz-Wiles0429.html
Stocks triumph over real estate
The stocks versus real estate debate has taken on new meaning lately, as the Dow Jones industrial average breaks records while housing prices stagnate.
“Debate” might be too strong of a word, since both investments are great for long-term wealth accumulation.
Nor is this an either/or situation, since you can hold both stocks and real estate at the same time and probably should. advertisement
Still, the latest housing problems should dispel any notions that real estate is a risk-free investment and one that usually beats the stock market. The first assertion is patently false and the latter probably so.
Clearly, there are several risks associated with real estate and housing in particular. Some, like foreclosure dangers, are pretty obvious. Others, like tax risk or the possibility that changing tax laws could harm owners, are subtle.
And there are additional dangers such as liquidity risk, which most real estate investors don’t think about until they must cash out of a property in a hurry and then discover that it might take months to do so. Meanwhile, they’re stuck with thousands of dollars in closing costs.
Usually, though, when people cite risk they’re referring to price volatility or the danger of incurring a capital loss. Historically, residential real estate has shown good resiliency, but there’s no guarantee that it will continue indefinitely.
Just last week, for example, the National Association of Realtors reported a 0.3 percent dip in existing home prices over the prior 12 months. That’s pretty modest, but we’re also not out of the slump yet.
More to the point, there have been instances where local markets have taken it on the chin for a notable stretch.
California home prices fell 13.4 percent over 19 quarters in the early 1990s, according to the Office of Federal Housing Enterprise Oversight.
Texas homes dropped 14.5 percent for more than two years in the late 1980s. Around the same time, Arizona homes fell 3.9 percent on average.
Nor is it easy to support the claim that real estate, especially housing, beats the stock market over time. If anything, the reverse seems more likely.
A study by Jack Clark Francis and Roger Ibbotson, cited recently by Money magazine, found companies in the Standard & Poor’s 500 index returned 13.4 percent annually from 1978 to 2004, against 8.6 percent for housing.
But key differences in the nature of stock investing compared with real estate make for an apples-to-oranges comparison. In particular, few investors borrow money in hopes of revving up their stock-market returns, since doing so would expose them to magnified volatility. You can leverage a stock portfolio through brokerage margin accounts, but it’s hardly routine and usually not wise.
By contrast, buyers generally do purchase real estate with borrowed money, as most couldn’t afford it otherwise. Leverage tends to boost returns over time, making real estate a better investment than it otherwise would seem.
Muddling the comparison even more is that homeowners receive a utilitarian benefit, shelter, that’s obviously lacking with a stock-market portfolio.
On the other hand, stock investments are much easier to oversee, with no need to hire a gardener or plumber, learn to paint or pick out carpeting.
It’s also easier to invest modest amounts in the stock market and get started quickly - employer 401(k) plans, which also feature free matching funds, are an example. Anyone needing to scrape up the cash for a down payment and closing costs in real estate could miss opportunities.
Tax breaks come into play on both stocks and housing, although real estate probably enjoys the general edge.
And the list goes on and on.
In fact, Money wrote a nice comparison of the two assets that can be viewed on the Web site http://money.cnn.com/ galleries. Scoring the contest as if it were a boxing match, Money concluded that “stocks win the bout four rounds to three, with one round a draw.”
Housing historically has been a solid investment and one that represents the bulk of net worth for most Americans.
But you can’t count on it to beat the stock market, and it’s certainly not risk-free.
The current soft times for housing will offer a silver lining if buyers and investors gain a better grasp of what’s involved.
“But over the long run stocks win easily.”
HA! I manage a mutual fund and separates accounts
and I would prefer commercial real estate by a mile!
Unfortunately, the study focuses on home ownership
as the definition of RE investing. This is misleading.
Commercial RE has many other advantages including
Depreciation
Leverage
Cash Flow
ETC
I have a group of friends who own the building we
lease. They just refinanced the building again for
the second time (lease rates have continued to go
up) and pulled out another $1,000,000 tax free -
to be paid back by firms like mine who are renters.
That said, one of anything is not a good formula for
security.
ampu
Buy Real Estate Stocks.
Here’s another view:
http://www.freemoneyfinance.com/2007/04/investment_smac.html
Just after we finished discussing the pros and cons of real estate versus stocks, Money magazine came out with a feature article in its May issue (sorry, I can’t find a link for it online) that compares the two. It’s a full-out analysis of what makes real estate a great investment, what makes stocks a great investment, and how the numbers for each line up. They look at several factors including performance (return), leverage, costs, taxes, transparency (how easy it is to assign a value), effort, volatility, and diversification — using cold, hard facts along the way to back up their findings.
So, what’s their conclusion? Here’s the summary:
Stocks win the bout four rounds to three, with one round a draw. But the fight is in truth considerably more lopsided. Stocks roll up large margins of victory in performance, costs, diversification and effort you need to expend as an investor. Real estate’s only big win is leverage.
But don’t get them wrong, they still think buying a house is a great financial move. They’re just saying that for investment purposes, they think stocks out-perform real estate. Their two cents on the issue:
Using that leverage to buy a home you can afford makes sense. You’re building equity and collecting other benefits as well. But jumping into the real estate ring thinking you’ll use others’ money to score an investing knockout is pretty risky. And the big prize, as you may have noticed if you’ve tried to flip a condo lately, is more elusive than it might have seemed.
Notice they said “a home you can afford?” It’s a key point. Many people stretch too far to buy a house they really can’t afford and end up in deep financial water.
The piece is a very interesting read and I suggest you either get the magazine or find it online (which I’m sure it will appear eventually — probably sometime in May.)
By the way, this is the same conclusion Forbes came to in determining the winner between stocks and real estate. Their main thoughts:
But if you take a longer view—say 25 years—you’ll find that the S&P 500 has actually stomped the real estate market, from Boston to Detroit to Dallas. From the start of 1980 to the end of 2004, home sale prices increased 247%. A pretty sweet deal, it would seem. Over the same period, however, the S&P 500 shot up more than 1,000%.
So from here, the only issue is how to make the most of your stock investing, right? You know how I’m going to answer that one. ;-)
I would also add a Round "9" -- Liquidity. Equities win hands down.
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