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.

Don’t hesitate to shoot Lane a message if you have any questions, or need any help. And check out the new links for FREE Property Searching, FREE Comparative Market Analysis and FREE Market Reports. They are near the top of the page…