Are Equities Still a Better Investment than Housing?

According to an article in Charles Schwab on Investing, Fall 2007 (p. 7), which looks like it was written by Matt Wood, stocks are a better investment than housing:

[R]esidential real estate provided an annualized return of 8.6% during the period from 1978 to 2004, compared with 13.4% for the S&P 500 Index (citing Jack Clark Francis et al, Contrasting Real Estate with Comparable Investments, 1978-2004, April 2007)

In some cases, [owning a home costs] as much as three times the purchase price [due to insurance premiums, maintenance costs, and property taxes]... Robert Shiller says real estate's historic real returns are closer to zero after adjusting for inflation. [David Crook, "Your Home Isn't the Nest Egg That You Think It Is," WSJ Online, March 12, 2007]

I refused to buy any property during the last five years, believing that everything in California was overpriced. Now, however, I am not so sure. Housing and other hard assets might not be a great investment, but they no longer appear to be flagrantly overpriced.

Comments

[spqrusa:]

In some cases, your analysis would be right. In our case, you would be wrong. We've purchased new homes every 3 years for the past 12 years and we have (even in this market in California) always returned at least 10% on assets and over 50% on investment.

2008 Nov 18 12:52 PM

[spqrusa:]

In some cases, your analysis would be right. In our case, you would be wrong. We've purchased new homes every 3 years for the past 12 years and we have (even in this market in California) always returned at least 10% on assets and over 50% on investment.

2008 Nov 18 12:52 PM

[Sperry8:]

Your analysis misses something quite large! The family who chooses NOT to buy a home and solely invests in stocks needs to live somewhere! So they rent! So this supposed earning of 13.6% is reduced dramatically. Because they pay money for rent and renters insurance. This money earns 0% and reduces the total % earned well below 13.6%, probably approaching 8.6% although I'd agree (unless you are renting in Manhattan), still slightly above 8.6%. But certainly not 5 percentage points higher!

So please, before you write an article of 'fear' gather all the facts.

2008 Nov 18 01:42 PM

[nym:]

Thanks Matthew. The Jack Clark Francis reference can be downloaded here:
corporate.morningstar....

2008 Nov 19 02:02 PM

[MNSL:]

I think so. I do not think that anybody can sell houses easily now.

We are still in the first stage of housing market downturn. Many houses are in negative equity. With falling employment, recession. Slower world growth, banking crisis and newly emerged credit mess will make housing market more and more vulnerable.

Stocks easily can sell even for loss now but not housing. As a result of this prices will drag down further. I do not think any recovery in the housing market for the next 10 years. By the end of next 10 years investment in equity will be better than invest in housing. We can just compare this at the end of next 10 years.

2008 Nov 21 09:30 PM