The Stock Market or Real Estate?

Almost everyone knows the three most important factors for investing in real estate: location, location, and location. Certainly, over the last several years, we have seen wildly different changes in the value of both residential and commercial real estate, with much of the variance determined by the geographic region and how that particular region was affected by various economic trends, whether the housing bubble and the collapse of mortgage-backed securities, or the downturn in manufacturing that decimated the value of much commercial property in the Northeast and upper Midwest.

But it is also true that many of the largest fortunes in this country have been amassed in the real estate industry–witness the current occupant of the White House. So, is real estate really all that risky? After all, as the other saying goes, they aren’t making any more land. Especially compared to the notorious ups and downs of the stock market, wouldn’t it be a good idea to have some of your investment portfolio in real estate?

The answer, as is often the case with such questions, is, “It depends.” From the beginning of 1999 to the end of 2004, US real estate prices, as valued by the Office of Federal Housing Enterprise Oversight, increased more than 56 percent. During that same period, the S&P 500 lost about six percent of its value.

But if you look at a longer time horizon, stocks have significantly outperformed real estate. From the beginning of 1980 to the end of 2004, for example, home sale prices increased 247 percent. Not bad, right? But during that same period, the S&P increased in value by more than 1,000 percent. Looking at a more recent period, US residential real estate returned 21 percent from 2010 to 2015; during that same period the S&P 500 returned 75 percent. Going all the way back to 1975 and continuing through the end of 2015, US residential real estate achieved an aggregate return of 595 percent, compared with a 2,352 percent increase in the value of the S&P 500.

Of course, there are reasons to own real estate other than the return on investment. Home ownership has a value to most of us that far exceeds the strictly financial considerations. For those who earn their livings from the land, owning farm or ranch property is a way of insuring continued independence and some measure of control over the means of production. And if an individual has deep familiarity with the business and economic cycles in a given community, that knowledge can often be leveraged to create returns on investment much higher than national averages might indicate.

So, it often makes good sense to have some portion of your assets invested in real estate. For example, we typically invest a portion of each client’s portfolio in real estate investments because it is dissimilar to stocks and its performance is not highly correlated with the stock market. You may want to talk to your financial advisor to review your complete portfolio and help you assess the appropriateness of your current asset mix, whether that includes stocks, bonds, real estate, or other assets.

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