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Maybe real estate isn’t such a good investment

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One of my favorite things is reading an article that takes some fundamental assumption we all make, calmly demolishes it with data and statistics, and then handily concludes like Jackie Chan would after beating someone’s ass.

Last week, the NYTimes ran such an article.

The housing boom of the last five years has made many homeowners feel like very, very smart investors…

As the value of real estate has skyrocketed, owners have become enamored of the wealth their homes are creating, with many concluding that real estate is now a safer and better investment than stocks. It turns out, though, that the last five years – when homes in some hot markets like Manhattan and Las Vegas have outperformed stocks – has been a highly unusual period.

In fact, by a wide margin over time, stock prices have risen more quickly than home values, even on the East and West Coasts, where home values have appreciated most.

In social psychology, one of the cognitive errors we make is called the availability heuristic–basically, if something is more recent or prominent in your mind, you will weigh it more heavily in your decision-making.

I really like the NYTimes article. It doesn’t dumb down the debate by saying that real estate is “good” or “bad,” but instead shows how a bunch of factors–inflation, spending on home improvement, the recent housing boom, and the value of having a place to live–affect our impressions of real estate vs. stocks as investments.

I need to look into the data to understand it better, but my gut feel is that this is an excellent analysis because it takes a long-term perspective and discards the stupid emotions that cause us to mistakenly overvalue certain investments (“Everyone is making $200,000 on their home!! We have to buy now!!!”).

So do I think real-estate is a bad investment? Of course not. But I want to look into the data so I can answer the question I am getting more and more these days: “What about real estate?”

Read the full article: In the Long Run, Sleep at Home and Invest in the Stock Market

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16 Comments on "Maybe real estate isn’t such a good investment"

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Freelove
Freelove
10 years 8 months ago

The key to real estate has already been mentioned in another of your blog entries… leverage and cash flow production. If you learn these two principles well you’ll be hard pressed to find another investment vehicle that compares.

The Donald
The Donald
10 years 7 months ago

Investing in real estate does not include buying the house that you live in! That is your residence, and you don’t gamble with that…

Real estate investing involves a lot more than “buying while the market is hot” and is definately not for amateurs!

Wesley
Wesley
10 years 4 months ago

Discussing this article with a friend raised a question: Clearly it is better to own stocks than real-estate, but what about using real-estate holdings to generate income (e.g. as rental properties) and investing the proceeds in the stock market? My initial guess is that this hedges against the risk of real-estate depreciating , and allows money to be dripped into investments to take advantage of dollar-cost-averaging, so this may be a fairly reasonable strategy. Any advice or other opinions?

stephen
stephen
10 years 1 month ago

One of the major differences between the two is taxes. Stock gains are taxted at the federal tax rate, while real estate gains (if owned for over a year) are taxed at the capital gains rate which is significantly lower than stock gains. Over the long haul this can tip the scale heavily in real estate’s favor.

Chris Fox
Chris Fox
9 years 9 months ago
I am the vice president of sales at a mortgage bank so I have a pretty good understanding o the real estate market and exactly how you can make money from it. What many people seem to overlook is that you can buy a house on margin. You haven’t been able to do that with stocks since the great depression. So basically I can buy a house for $1,000 of my own money using 100% financing. If I do my homework and pick a property in a booming area in the state of california I’ll see an average rate of… Read more »
Scott
9 years 8 months ago

I don’t understand how anyone can say “Clearly it’s better to own stocks than real estate”, as Wesley says above in Comment #3. On my blog, Money Mindset, I discuss the main reasons people invest in “income properties”.

Chris has it more correct in Comment #5, but I don’t think stocks offer as many advantages (see my link), other than it is “easy to get in and out of stocks”,. But it’s also easy to shoot yourself; doesn’t always make it a good thing to do.

Let me know what you think.

ajmehta
9 years 4 months ago
I also agree that you can’t make the generalization “clearly it’s better to own stocks than real estate.” It really depends on the person and depends on their goals. For most people that are willing to put in some time, owning both is probably the best decision. For the “buy it and hold forever” type of investor (like me) in real estate, there really isn’t a good or bad time to buy. There are only good and bad properties to buy. Figure it this way: if you buy today with as little as you can, and still breakeven on a… Read more »
Jonathan
Jonathan
8 years 8 months ago
Great post ramit. If you haven’t seen these they are pretty good and provided some more nuance to the housing market and to what is going on in SF. 1. Is from SF Chronicle and does a really good job showing the nuance of the stats and why the high value locations aren’t weak compared to the surrounding areas and how those outer SF regions areas skew the data because they significantly overweight the metrics that are based on single family homes. The closer you get to the heart of the city (the less single family homes). http://www.sfgate.com/flat/archive/2008/01/04/g/a/2008/01/04/carollloyd.html 2. The… Read more »
Nate
Nate
8 years 8 months ago
Yo Stephen, stock market gains are taxed at the capital gains rate as well as long as you hold them for some minimum amount of time (I believe it’s one year, although I could be mistaken). Also, interest payments being tax deductible shouldn’t be considered a feather in real estate’s cap. You are still paying interest. You just don’t have to pay taxes on the money you pay for interest. WIth stocks, you pay 0 interest. And that leads me to the crux of my argument…mainly that I am highly skeptical of an investment that requires me to pay more… Read more »
Barbara Saunders
8 years 4 months ago

What makes something a “good” investment depends on your current goals — life goals as well as financial goals. It is possible to lose a great deal of money in real estate — and take on a lot of work, legal liability, and hassle. And, there’s timing — At a particular time in life, it might make more sense to, say, invest in a business venture rather than in real estate.

jsweez
jsweez
8 years 2 months ago
Great topic! This is a difficult question — one I used to get all the time as a real estate reporter: Is now a good time to buy? If you look at the data patterns for home values you quickly see that the market moves in cycles, rotating from buyers to sellers markets every 10 years or so. But even this is just a general look. I think the most important things to keep in mind when considering a real estate purchase are your local market (local as in.. your neighborhood, similar homes, and the job market, not just your… Read more »
Keith Hudson
8 years 2 months ago
Ramit, although I’m not surprised that a NY Times reporter is so uneducated as to try and compare stocks and real estate as alternate investments without discussing margin, I’m shocked that you purport to be able to teach me how to be rich, and you did not point out his obvious error. Because of the ability to purchase real estate with only a small percentage of the purchase price, simply comparing the rate of growth in stocks to the rate of growth of real estate is highly misleading. Of course, any discussion of leverage in investing requires some discussion of… Read more »
Frank
Frank
7 years 7 months ago

All my life I heard about how real estate was a rock solid investment so I finally bought with cash in 2006. I have now lost $150,000.00 in just under 3 years and it continues to sink. It may take 20 years to recoup the money if I do at all. So much for common wisdom.

Dr Phillips Real Estate
8 months 11 days ago

Real estate is and always will be about local markets and not all markets are good investments.

daniel
8 months 9 days ago

Thanks for posting about property investment.really helpful.

Andrew
Andrew
5 months 15 days ago

This is hilarious to read in 2016! Obviously those housing values were short-lived — I bet more people wish they had taken this advice.

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