What is a better investment?

I was up late, and caught a little bit of the Nightline episode where they featured a “bubble blogger” in California. One of the statements he made was that housing was not a good investment compared to the stock market over the last 30 years. That line was screaming at me.

I went to Google to try and find national average home appreciation rates for the last 30 years. I wasn’t able to. I was able to find the annualized appreciation for the last 10 years though. According to S&P (warning, pdf file), average annualized returns for homes were 10.93%, while the stock market was 7.63% for the same period.

So, my next stop was to open up an excel spreadsheet and start making some calculations. I based the interest rate at 8%. I ran the calculation based on 5% down, 10% and 20% as well. I also calculated the return on stock purchases either with cash or on margin (50% down). I thought the numbers would be pretty tough on the stock market, but I didn’t think it would come out this lopsided. I based this on a $200,000 investment.

(***Warning, these are not annualized numbers, but overall returns for a 10 year period)

• For a buyer putting down $10,000 (5%), they would have a 10 year return of 2215%
• For a buyer putting down $20,000 (10%), they would have a 10 year return of 1145%
• For a buyer putting down $40,000 (20%), they would have a 10 year return of 610%
• For a buyer paying cash, they would have a 10 year return of 182%
• For a stock investor buying $200,000 in the S&P 500, they would have a 10 year return of 109%
• For a stock investor buying $200,000 in the S&P500 on margin ($100,000 investment, 8% APR), they would have a 10 year return of 137%

Like I said, I was sure that real estate would come out better because of the power of leverage. However, I didn’t expect it to be that lopsided.

I’m sure that there are mistakes in my methodology that can be found. I spent a few minutes putting this together, however, there are also a lot of other items that would go in favor of real estate. among the items that I didn’t account for that would increase the real world rate of return for real estate are these:

• Home Mortgage Interest Deduction
• Value of rent (you can live in the house, but not in the stock)
• Lack of volatility (S&P rated homes at 2.07% v. stocks at 15.28% volatility)

Of course, there are a few items that would offset these:

• Home maintenance
• Utilities
• Repairs

But, I would still argue that home ownership is CLEARLY the first step towards a solid financial future.