Real estate or stock: Which is the better investment? Matt 19 Aug 2005

36 comments Latest by William DuBay

These days, housing prices seem to know no bounds. And in a recent poll, eighty percent of Americans deemed real estate a safer investment than stocks (only 13 percent said stocks were safer). Yet the truth is that, over time, stock prices have risen more quickly than home values by a wide margin (NY Times).

Why the disparity between perception and reality? While the 2000 stock market collapse is still fresh in people’s minds, you don’t hear much talk about how housing prices in the Northeast and California fell less than 15 years ago. Also, unlike your home’s price, the volatility of stocks can be viewed each day in the paper.

The good news for home-owners is that there’s a value in a home you don’t get from stocks; You can actually use it. Plus, it provides a safety net in bad times. Also, homeowners are forced to be long-term investors — meaning they don’t try to time the market — which is usually a wise approach.

36 comments so far (Jump to latest)

Matt Haughey 19 Aug 05

Why the disparity between perception and reality?

I think people are just more comfortable buying/investing in objects. Like you said, a home is something you can live in, rent, or have as a vacation spot, stocks are more like imaginary things.

Brad 19 Aug 05

A “safer” investment and an investment with a higher rate of return are not the same thing. I don’t think there’s a gap in perception here. Stocks may provide higher returns in the long run but clearly a house is a “safer” investment: you can lose your entire investment with a stock, but with a house the value is highly unlikely to drop to zero.

One interesting alternative investment to stocks is investing in energy-efficiency upgrades to your home. The rates of return typically beat the stock market hands down. The S&P 500 average return on investment from 1993-2003 was 16.8%. In comparison, replacing an old refrigerator with an Energy Star model can give you a 27% rate of return, and converting your incandescent light bulbs to compact fluorescents can give you a 41% return. If you funnel the energy cost savings into the stock market, money market, or even a savings account, the return is even higher.

brian breslin 19 Aug 05

this is an interesting question, i know here in miami home prices have soared an absurd amount in the last 3 years. So much so that they are basically unaffordable to most working people, and outside investors are buying up lots of them. However the common fear alot of would-be buyers I see now (those who can afford the properties at their inflated prices), is that the market for homes will crash (they envision it as a stock market crash, when in reality its more like what Brad said). The biggest risk I see in these hot markets for realestate is that the prices flatten, and all those people who bought these second or third homes to flip them are caught with their hands in the cookie jar, and they can’t make a profit on their investment, then they realize they can’t afford to hold onto these houses for another few years till the market rebounds…

Brady Joslin 19 Aug 05

Economists caution that any comparison between real estate and stocks is tricky, because real estate is typically a leveraged investment, in which a home buyer makes a down payment equal to only a fraction of a house’s value and borrows to finance the rest.

That’s the key here, and should not be overlooked. It isn’t how much your house appreciated vs. the amount increase of the S&P. You have to think about how much of your cash is going into the real estate investment and how much you will get out of it. So, yeah, you typically shouldn’t buy real estate with cash.

Sweeping generalizations don’t work; invest wisely in either and you can make a nice profit over time. The wiser (or luckier) you are, the shorter that time period.

Josh 19 Aug 05

Success in markets comes from buying x when everybody else is buying y.

Neither is a fundamentally better investment; it depends on the market situation. Now, however, is probably not the best time to speculate on real estate.

Josh (again) 19 Aug 05

Brady, I don’t think that’s the main difference. Although the average American may be more leveraged in their real estate transactions, it’s pretty easy to get massive amounts of leverage for pretty much any investment.

The most obvious one for the stock market is buying on margin. Less obvious, but not by much, is options trading.

Benjy 19 Aug 05

I was about to make the same point Brady did. It’s all about leverage. Most stock investors pay 100% of the share price for the stock, while home buyers typically put down only 10 or 20%.

Let’s say you buy $100,000 worth of a stock that goes up the S&P avg. of 10% annually. At the end of 5 years, it’s worth $161,051. A 61% gain in equity.

Now let’s say you buy a house for $100,000 and put down 20%. For simplicity, we’ll assume an interest-only loan. At 7% annual appreciation, it’s worth 140,255 in 5 years. Your $20,000 has become $40,255 — you’ve doubled your money! And you’ve had a place to live in. And there are tax breaks for home ownership.

Darrel 19 Aug 05

“Why the disparity between perception and reality?”

This is America. We thrive on that disparity.

Peter Cooper 19 Aug 05

In Europe, real estate is so significantly a better investment than stock that you’d be an idiot not to invest in it if you had the money. European stocks are not so volatile, so you don’t get the growth.

In the US, it’s a totally different situation. Americans are going on about these housing bubbles, but the US housing bubble isn’t even a blip on the radar compared to the European housing situation. My parents’ house has almost tripled in cash value in less than five years, yet their stock (which we got for free) in the UK’s most profitable bank (billions every year) is of the same value as ten years ago.

The average home price in the UK, for example, now requires more than double the average national salary to finance a mortgage on it.

Brady Joslin 19 Aug 05

Josh, I really don’t think the vast majority of investors buy on margin or do options trading.

Even if so, my point still stands. Financially, any investment it is about the adjusted value of resulting net cash benefits.

But, yes, you can live in your house, but you can’t live in a pile of stock certificates (comfortably).

Jason Gilstrap 19 Aug 05

I don’t agree that there is much of a disparity here. Whether one invests in real estate or the stock market should mostly be determined by an investor’s goals. Real estate is likely to always be the safer investment than a single stock, which can lose all of its value. However, history shows that investing in a diversified stock portfolio results in higher gains in the long run.

Carl 19 Aug 05

Don’t forget there’s equity you can USE in a home. Plus there are significant tax savings for home owners including not paying a penny of tax on the gain of a sale if you’ve lived in the home for 2 years. Compare that with 15% cap gains tax on stocks and you’ll see why real estate is better on a variety of levels.

Django 19 Aug 05

Despite its tone, the article contradicts itself and says (when taken as an investment) property has achieved 15% a year since 1980 which is better than the stock market. The point about the leverage working both ways with the risk of negative equity is a good one. However, in this situation it makes little sense for lenders to foreclose and they will prefer to reschedule the loan.

Gelded Gosling 19 Aug 05

Personally I believe real estate or stocks if well done can both be extremely good investments. Unfortunately, real estate is often a house on some land. You have to mow the lawn, keep the roof from leaking, and all that jazz. If this becomes four or five investment houses the upkeep and possibly dealing with renters turns out to be a major job. Then you have to buy and sell them and deal with closing costs

So far this year I’m up over 100% on stock investments and I believe I could manage up to $5M without stepping up my effort a whole lot from the current 5-10 hours a week. I believe stocks scale better as investments, but starting out either one can make a great investment.

Todd 19 Aug 05

Benjy’s comments leave out some important information. After the 5 years of appreciation, if one chooses to sell their house, there is a 6% commission, excise taxes and closing costs. Just the commission alone reduces the gain to $31,839.30. Excise taxes and closing costs reduce this gain even further.

Taking into account that you only save 30 cents on the dollar in income tax each year and you have to maintain the property during ownership, one would have to achieve the 7% annual gain just to break even after 5 years

Derek 19 Aug 05

I say do both.

The trick is to buy the house with an interest only loan and put ZERO money into the house. Instead take that money and invest it in something that pays a higher interest rate than you’re paying on the mortgage. The house will appreciate as normal, but the cash you would normally have stuck up in equity can now be invested elsewhere.

You can pay 7% on the mortgage and get a tax break which essentially will make it something even lower. Then if you can make 10% interest on the stock market you’re doing what the banks do. You’re investing your money at a higher interest ray than you’re paying to borrow.

Of course it’s a little risky, but it’s not a new idea.

Daniel 19 Aug 05


Sam 19 Aug 05

Real estate is not just housing. Commercial real estate has been a great investment in this country for more than 50 years. Aside from the attractive return on equity, it also generates income.

sj 19 Aug 05

neither :)

I think it’s a lot more complicated than one being safer or one producing a higher rate of return. Josh nailed it when he said that the safer investment is the one people are usually avoiding. The first principle of investing is supposed to be ‘buy low, sell high’ but very few people actually adhere to it. Instead, they look at all the people rushing into housing and think, “They must be onto something….I’m probably missing out…..I better do the same!” When the market dropped in 2001, a lot of people were doing the same kind of thing, and were totally caught off guard.

If one is wanting to time or guess which investment is going to pay off, their job is going to be much more difficult in the next few years. China + India + millions of boomers being forced to pull their momey out of the market = a very interesting time to be alive…..

As for me, I’m investing in tulip bulbs…..sure they’ve been down lately, but historically speaking……

Elaine Nelson 19 Aug 05

you don�t hear much talk about how housing prices in the Northeast and California fell less than 15 years ago

see, I remember that one…I grew up in So Cal, and our neighbor when I was in high school (88-92) moved in wanting to use the house as an investment. y’know, live there a year or two and sell it to some other sucker.

then the market dropped.

I think she finally sold the house just a couple of years ago, and even then just barely coming out ahead, according to my mother. and the whole time she hated the neighborhood, got in arguments about other people’s yards, etc. so much so that they had a block party after she moved!

which I guess makes the lesson of home buying that you ought to at least like where you buy.

Rob 20 Aug 05

You can’t look at it as, which is a safe investment…Both can be viewed as safe or risky.. In the long term real estate always outpreforms the stock market. Stocks are not tangible and do not become assets until you sell them..While real estate on the other hand is a tangible..If you rent out your 2 flat and genreate passive cash-flow on a monthly basis, that is something stocks cannot do unless you sell the stocks.

Also real estate give you complete control on what to do with your investment..You own the property and you can decide to rent it out, fix it up, sell it don’t have complete control when you invest in stocks..someone else is making the decision of the company or commodity that you invest are just giving them some cash..

It all comes down to what is right for you and making an informed decision. There is always be a need for housing because its a basic necessity (shelter)…even in a overinflated market..

Kris 20 Aug 05

My wife and I are getting out of real estate investing - selling our rentals. Financially it has been somewhat successful - but it has cost us time and stress. We have young kids and full time jobs = not a lot of free time.

Investing is not just a numbers game, your investments have to match your life situation and personality.

Matt Margolis 21 Aug 05

Real estate has one big advantage over trading stocks. Each and every month that you have the property rented you receive rent income in addition to the potential increase in property value due to market dynamics. So not only can your building’s value increase but you also get paid just to hold onto it.
Unless you are buying stocks that pay dividends then you are not going to be receiving any cash until you sell your stocks.

A combination of stocks and real estate that a lot of people I know do is to pay off their buildings as quick as possible while putting a certain percentage of the paid rent into stocks. This way by the time the building is paid off they have amassed a nice portfolio that can then be added to at a greater amount per unit of time because the building is no longer under a mortgage so it has a lower monthly upkeep.

Darrel 22 Aug 05

“Real estate has one big advantage over trading stocks. Each and every month that you have the property rented you receive rent income in addition to the potential increase in property value due to market dynamics.”

And one big disadvantage: the converse for every month the property is NOT rented.

Dave 22 Aug 05

But Darrel, even in every month the property is not rented, its value tends to go up. The rent money is just icing on the investment cake.

wayne 24 Aug 05

Theorectically, personal real estate should never be considered an investment. There is no intrinsic value in a home except for its utility as a home. The price of your home only goes up based on the fact that somebody is willing to pay more for that house. The fact that somebody is willing and able to pay more for that same house at a later date has nothing to do with the house itself. More often than not, factors in the decisions making process of the buyer for bidding on the house has changed (higher income, lower interest rates).

Don Schenck 25 Aug 05

Sorry, but if you don’t diversify, you’re asking for trouble.

Real Estate, the Market, munies, hard assets, Cayman Islands account, etc. … spread it around, folks. You’ll sleep well.

m financial commissions 30 Aug 05

real estate investment trust (reit); much better for growing investment, but also about as risky as real estate. always look for that investment component in a relatively “safe” category with a cash investment tied to it.

Robert 15 Dec 05

You give an oversimplified argument from my way of thinking.
The far more substantial bnefit to investing in real estate is that you get to make your deal. Just as Donald Trump said in the “Art of the Deal”, investment returns in real estate are dictated by how good a deal you got when you bought. In the stock market you can be equally savvy but most investors do not have the value nose like Warren buffet, and you buy at the market price. In real estate you can buy from distressed sellers ala…forclosure, probate, or as one deal I bought, from an estate that was willed to a church who just wanted thier cash out of it and didn’t want to run a property which was easy to run a retail store( landlording only). I bought one deal from a guy in BANKRUPCY that cash flows well also. You can do that in stocks. but most people don’t have the savvy to do so. WHO NEEDS AVERAGE RETURNS/??

PROCOL 10 Mar 06


PROCOL 10 Mar 06


Steve 01 Jun 06

There are several rules which play out when investing in real estate. We experienced them first hand, and we are now invested in safe CD’s. Some of these are: There will be property taxes, capital gain or income taxes, advertising fees for finding tenants, and repairs and upkeep. All of these play out in every real estate transaction that involves a tenant, and nearly all of them if you live in the dwelling. All of these things are out of your control and will be determined by someone other than yourself. None of them play out in investing. If you are adding mortgage interest on a loan into the mix, it is going to be difficult to see much of a profit, especially in the times when tenants are late w/ the rent or the a/c system dies an unexpected death. Going to make your money on the back end when you sell? Fine, but the appreciation level is again totally out of your control, and if the economy or the housing market goes blooey won’t be there at all. If you are fortunate and your property appreciares, in addition to all the other costs I mentioned, factor in 6% of sale price to your realtor, numerous items to be fixed when the buyer has their home inspection, improvements you will have to make to give buyers a reason to pick your place from all the others on the market, taxes at the state and federal level on the profits, and a tidy sum to the title company. Not to mention the stress involved in having a home on the market.

Angie McCullough 21 Aug 06

Of coarse there are ups and downs in the appreciation rate of real estate just as there are in stocks. If you really want to get the most bang for your buck though, real estate is the way to go. If you invest $30,000 in a stock and it goes up 10% in the first you you profit $3,000. If you invest that same $30,000 in Real Estate and it only appreciates 1% in the first year you make $3,000. Just imagine the profit if the property appreciates 10%.

William DuBay 09 Sep 06

I have come to the conclusion that real estate is a good investment if you need a place to raise your family.

I am not impressed by the “tax benefits” of home ownership. Few of the comments above mention owner costs: improvements, maintenance, repair, debt interest, and property taxes and assessments.

Renters escape those costs. Some renters get free utilities such as water, waste, and sewage. They often get free repairs and free replacements of such things as carpets and ranges. Living in your own home, on the other hand, is never “free.”

Remember that mortgage interest is deducted from income, not taxes in your 1040 form. While that is a handsome inducement for ownership (and a great subsidy for the real-estate industry), you still end up paying up to two-thirds of your interest on a mortgage, depending on your tax range.

Also remember that ownership costs are real. The appreciation of your home (your investment payoff) is only speculation until you sell your house.

To find out the real value of real estate as an “investment” you have to subtract accumulated ownership costs from realized appreciation. The above studies fail to do that.