Read This, Spike That
The U.S. Has a Misguided Faith in Real Estate
Though Americans believe land and houses are great long-term investments, the data beg to differ.
By John Kimelman
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What’s the better long-term investment: stocks or real estate?
As a litmus-test question, it’s right up there with boxers or briefs, Beatles or Stones, or even Trump or Clinton.
Apparently, if you poll Americans on this question, you’ll get an answer that deviates from the right answer.
According to a recently released national survey conducted for Bankrate.com in July, 25% of the respondents said that real estate was the best way to invest money over a 10-year period. In fact, real estate won over all other asset classes.
Were stocks the second choice? No, that honor goes to “cash investments,” which includes bank certificates of deposit.
Stocks, as it turns out, were tied with “gold or precious metals,” as a third-choice investment.
According to the study, real estate’s leg up may have something to do with the fact that it’s more tangible (and in many instances more enjoyable). Stocks are merely a fractional ownership of corporate equity that shows up as a line of type on a brokerage statement.
In addition, stock meltdowns in both the year 2000 and in 2008 have left many with bad tastes in their mouths about stock investing.
And those risk-averse millennials seem to like cash a lot more than middle-aged investors, according to the survey, even though millennials are at an age where they can afford to take more risk.
But should Americans be placing that much faith in real estate?
Clearly not, argues Robert Shiller, the influential Yale economist. In a recent piece in the New York Times, Shiller writes that despite solid price increases in “the last few years, land and homes have been disappointing investments.”
Shiller provided data on both farmland and home values to make his case.
“Over the century from 1915 to 2015, though, the real value of American farmland (deflated by the Consumer Price Index) increased only 3.1 times, according to the Department of Agriculture. That comes to an average increase of only 1.1 percent a year — and with a growing population, that’s barely enough to keep per capita real land value unchanged,” Shiller writes.
As for inflation-adjusted home prices, he adds, they rose even more slowly over the same period — a total increase of 1.8 times, which comes to an average of only 0.6% a year.
“What all that amounts to is that neither farmland nor housing has been a great place to invest money over the long term,” adds Shiller.
The Yale professor further points out that real or inflation-adjusted gross domestic product in the United States grew 15.5 times — or, on average, 3.2% a year — from 1929, the year official GDP numbers began to be kept, to 2015.
“That’s a much higher growth rate than for real estate. But why? For home prices, a good part of the answer comes from supply and demand. As prices rise, companies build more houses and the supply floods the market, keeping prices down,” he adds.
By contrast, most studies of stock performance going back over the past century show annualized returns in the low double-digits.
For readers who want to probe the relative merits of stocks versus real estate investment, I would suggest starting with this primer on the topic that I found surfing the Web.
As for me, I don’t confuse assets I enjoy with ones that are truly making me money over the long run. For me, it’s two homes to live in, and stocks and exchange-traded funds for the long run, along with bonds for ballast.
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