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.
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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.