Stocks or Real Estate? Why not both?
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In a recent article, Matt Krantz of USA Today addresses the ongoing battle between Stocks and Real Estate.
According to Krantz, the housing boom has been so strong lately that in some places less than 10% of residents can afford to buy a home. It hasn't been unusual in some cities for home prices to soar 15% or more a year for several years.
To accurately portray which has performed better (real estate or the stock market) over the past 10 years, Krantz compares the IFA Total U.S. Market Index, which measures the value of the stock market, to the IFA Real Estate Securities Index between January 1, 1996 and Jan 32, 2006. This analysis shows us real estate investments, in this case real estate investment trusts, have blown away stocks the past decade, estimating that the IFA Real Estate Securities index has gained 15.76% on average per year (a total gain of 338%!) according to IFA.com. That beats out the 8.93% annualized and 132% overall total return of the IFA Total U.S. Market Index (according to IFA.com) Furthermore, the Real Estate Market has been less risky.
However, another source of analysis provides a different story. In examining the median price of existing single-family homes, using data from the National Association of Realtors, we know that last year, the median price was $208,700, an increase of 12.7% from the previous year. We also know that the median price of homes at the end of 1995 was $110,500, which works out to a compound average annual rate of growth of 6.5% each year. Using this data, the annualized return of the IFA Total U.S. Market Index for Stocks beats out the returns on Real Estate.
Home appreciation doesn't always beat stocks. In fact, you'll find stocks tend to outperform home price appreciation most of the time. Furthermore, according to Krantz, you are better off owning a basket of many real estate assets, such as real a real estate mutual fund, than property in an area that might not appreciate.
Despite everything we've covered, real estate can be a valuable addition to many investors' portfolios. Real estate stocks often zig when other stocks zag, Krantz adds. The correlation between real estate stocks and stocks in general is generally low, and your best bet is to find the right middle ground in investing within both arenas.
In a recent article, Matt Krantz of USA Today addresses the ongoing battle between Stocks and Real Estate.
According to Krantz, the housing boom has been so strong lately that in some places less than 10% of residents can afford to buy a home. It hasn't been unusual in some cities for home prices to soar 15% or more a year for several years.
To accurately portray which has performed better (real estate or the stock market) over the past 10 years, Krantz compares the IFA Total U.S. Market Index, which measures the value of the stock market, to the IFA Real Estate Securities Index between January 1, 1996 and Jan 32, 2006. This analysis shows us real estate investments, in this case real estate investment trusts, have blown away stocks the past decade, estimating that the IFA Real Estate Securities index has gained 15.76% on average per year (a total gain of 338%!) according to IFA.com. That beats out the 8.93% annualized and 132% overall total return of the IFA Total U.S. Market Index (according to IFA.com) Furthermore, the Real Estate Market has been less risky.
However, another source of analysis provides a different story. In examining the median price of existing single-family homes, using data from the National Association of Realtors, we know that last year, the median price was $208,700, an increase of 12.7% from the previous year. We also know that the median price of homes at the end of 1995 was $110,500, which works out to a compound average annual rate of growth of 6.5% each year. Using this data, the annualized return of the IFA Total U.S. Market Index for Stocks beats out the returns on Real Estate.
Home appreciation doesn't always beat stocks. In fact, you'll find stocks tend to outperform home price appreciation most of the time. Furthermore, according to Krantz, you are better off owning a basket of many real estate assets, such as real a real estate mutual fund, than property in an area that might not appreciate.
Despite everything we've covered, real estate can be a valuable addition to many investors' portfolios. Real estate stocks often zig when other stocks zag, Krantz adds. The correlation between real estate stocks and stocks in general is generally low, and your best bet is to find the right middle ground in investing within both arenas.
posted by James Haft at 3:20 PM
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