Friday, August 19, 2005

Equities vs real estate

It is well known among professionals that historical equity returns beat real estate returns by quite a margin. Successful companies generate innovation and create real economic value, so it would be surprising if equities didn't outperform an inert asset like housing over the long run. (On a risk-adjusted or tax and leverage-adjusted basis housing might be competitive, though.) We're nowhere near running out of space in this country, despite what housing bubble speculators might think. See previous posts, here and here.

NYTimes: When Marti and Ray Jacobs sold the five-bedroom colonial house in Harrington Park, N.J., where they had lived since 1970, they made what looked like a typically impressive profit. They had paid $110,000 to have the house built and sold it in July for $900,000.

But the truth is that much of the gain came from simple price inflation, the same force that has made a gallon of milk more expensive today than it was three decades ago. The Jacobses also invested tens of thousands of dollars in a new master bathroom, with marble floors, a Jacuzzi bathtub and vanity cabinets.

Add it all up, and they ended up making an inflation-adjusted profit of less than 10 percent over the 35 years.

That return does not come close to the gains of the stock market over the same period. The Standard & Poor's 500-stock index has increased almost 200 percent since 1970, even after accounting for inflation.

14 comments:

Anonymous said...

steve wrote, Successful companies generate innovation and create real economic value, so it would be surprising if equities didn't outperform an inert asset like housing over the long run.

I don't believe it. Economic growth generates demand for land, so land rents tend to increase in direct proportion with GDP.

It's not intuitive, and it's not "fair"---we'd expect productive activities like innovation to have a better return. But it's what happens when a fundamental economic input (like land) is in fixed supply.

--SJF

Anonymous said...

steve wrote, Successful companies generate innovation and create real economic value, ...

This isn't necessarily true.

The best way to be successful is to collect economic rents.

Good examples are Microsoft and much of the pharmaceutical industry.

IMHO, hardware companies are far more innovative than many software companies (well, e.g., Microsoft), and AFAIK they are far less profitable. That's because their market is far more competitive.

And the reason the land market can be so profitable is, again, economic rents.

That doesn't mean I think rent collection is a good thing. Rather, it's much harder to profit by genuinely contributing to the economy (through innovation, entrepreneurship, or plain old labor) than it is to collect rents.

-- SJF

Anonymous said...

Add it all up, and they ended up making an inflation-adjusted profit of less than 10 percent over the 35 years.

That return does not come close to the gains of the stock market over the same period. The Standard & Poor's 500-stock index has increased almost 200 percent since 1970, even after accounting for inflation.

This doesn't take into account dividends---certainly not for the house, where the "dividend" is the income represented by the consumption in having a place to live. Not clear it looks at the dividends thrown off by the S&P 500 either.

--SJF

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Anonymous said...

You have to keep in mind that real estate investments are always leveraged. So if equities annual rate of return is 12%, and real estate is 6%, return on investment for equities is 12% while real estate is 24% since typical down payment is 20%. 4 to 1.

--JHH

Anonymous said...

Whoever wrote this is incredibly ignorant of real estate investing. I'd choose real estate hands down any day over stocks. Friends don't let friends invest in stocks. Learn your local market trends buy when real estate is unfavored and cash flows and sell when people think you can't lose with real estate.

agent website design said...

I could afford to buy a decent condo or small home near all my friends and family that I can use when I'm in town and eventually possibly sell.according to me profit remains more in real estate as per compare to equity stocks.But investments needs to be huge.

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