Sunday, April 22, 2007

stocks vs. real estate

I found this here, and thought that it might be of interest (no pun intended). I emphasised a couple of lines.

The premise is that the stock market out-performs RE in the long term. Not exactly news, but there are some pretty charts and numbers. It is a 9 page series.

Of course, these last 7 years or so are an aberration, and it's different... blah, blah.

Stocks vs. Real Estate

Both real estate and stocks have had their day, but the question you need answered is this: Which contender is the superior long-term bet today?
By Marlys Harris, Money Magazine senior editor

Round 1

Real estate has packed quite a punch of late, appreciating 12.4% annually between 2001 and 2006, according to the S&P/Case-Shiller U.S. Home Price index. That clobbered stock prices, which gained only 4.3% a year as measured by the S&P 500.
But over the long run stocks win easily. A new study by Jack Clark Francis, a finance and economics professor at Baruch College in New York City, and Yale's Roger G. Ibbotson compared the annual returns of real estate from 1978 to 2004 compared with those of 15 different "paper" investments, including stocks, bonds, commodities futures, mortgage securities and real estate investment trusts (REITs).

The results? Housing delivered a solid but unimpressive annualized return of 8.6%. Commercial property did better at 9.5%. The S&P, however, delivered a crushing 13.4%.

Other studies argue that real estate's returns are much worse. Yale finance and economics professor Robert Shiller, author of Irrational Exuberance, who looked back to 1890, contends that only twice has real estate produced truly outstanding returns: after World War II, when returning troops were starting their families, and from 1998 to 2005, a period he thinks is a bubble.

Housing's rate of return, he argues, has to trend back to the mean of about 3% a year - barely above the inflation rate. If that's starting to happen now, he says, we could be facing many years of losses.

Before you decide that real estate is already down for the count, though, consider this: Equity REITs, which own stakes in commercial properties, were among the best performers in the Francis-Ibbotson study, with annual returns of 14.8%. But REITs are stocks, after all.
From the last page -
Real estate's only big win is in leverage. Using that leverage to buy a home you can afford makes sense. You're building equity and collecting other benefits as well. (And no landlord can stop you from owning a big, hairy dog or throwing a party for 200 of your noisiest friends.)

But jumping into the real estate ring thinking you'll use others' money to score an investing knockout is plenty risky. And the big prize, as you may have noticed if you've tried to flip a condo lately, is more elusive than it might have seemed.

I personally think that the stock markets and RE are over-valued right now, and I can't figure out what is going on except for cheap money. That cheap money is about to get more expensive by all indications.


Anonymous said...

Great blog! Thanks!

Anonymous said...

As you stated, stocks are over-valued, too. The liquidity in the M3 will affect all assets in the end. However, RE will have a far more detrimental effect. Greenspan should be apologizing, not giving rah-rah speeches.

patriotz said...

The TSX currently has an aggregate P/E of 16 or so. Vancouver RE has a P/E (remember earnings are rent minus all expenses) of about 40. In other words, if you took your money and bought a place and rented it out, you'd get about a 2.5% net annual yield.

So if stocks are overvalued, Vancouver RE is vastly overvalued. At least stocks are earning more than an ING savings account.

Warren said...

When you talk about the whole monetary system being overvalued, you begin you to sound like a gold-hoarding, tin foil wearing nut job (no offense of course :).

RE is clearly beyond reason, but I think stable, large cap stocks would be a good thing to hold now.

Unknown said...

1st, what's wrong with hoarding gold and wearing tinfoil?

Second, its pretty pointless to compare unleveraged long term real estate with stocks. Fully paid up re at todays' Vancouver prices probably returns 3.5% without taking into account capital gains. Factor in leverage and its not uncommon to get returns of 600% on investment properties.

Leverage can be negative? Long term, on properties that you can hold? Unlikley. Also, there is a time honoured, specific to RE way of getting leverage - that's right, a mortgage. Any wisdom behind that old ploy? any explanation for its success? It's not the foreclosure aspect. It's the security and cashflow.

5% average, long term, with leverage, is awesome.

solipsist said...

anon - you are welcome, and thanks.

bc-cele - there you go with M3 - which is esoteric to me (in the big picture). I understand it to be the total money supply, but that is abstract too - when the US reportedly owes more money (in aggregate) than all of it's material goods/property are worth. I just don't get that. To me, it's kind of like standing on the gas pedal, while applying the brakes, and talking about your gas mileage.

patriotz - isn't even a P/E of 16 an indicator of over-value? As is M3, P/E is a bit esoteric to me. I do think that I have a practical sense of value though. At least, to me.

warren - I said that I thought the stock market and real estate were over-valued. If that is "the whole monetary system", well, ok. I fail to follow you to tin foil and gold hoarding though. Personally, I hoard seeds.

The Motley Fool asks - "Dow 5,000?", and states - "Contrarian that I am, I think a great way to celebrate Dow 13,000 is by preparing for the market's all-but-inevitable next pullback -- in other words, plan for the bad when times are good." Whatever you read into that...

An interesting tid-bit - It took the Dow 7 years to go from 11,000 to 12,000, but is spiking to 13,000 in the 6 months since (as heard on CBC today).

I am a nut job, so your acidulous comment does not offend. Glad to be recognised.

Large Cap stocks can be generally reliable - as long as they are not GM, Ford, Chrysler, Menu Foods, the company that makes Cold FX, or such.

Rob - mea culpa. I often (unfairly) mix specuvestors and pro's into the same pot. I do believe that this madness is largely driven by those with stars in their eyes, and visions of sugar plums, etc.

On the other hand, you have been saying for some time that there is little worth consideration by true investors. The South Burnaby property described at your place being a case in point. Was it a real builder that bought it? Or Jimmy Jazz and his cousin, hoping to make it big a la "Flip This House".

I'm off to plant some rutabagas.

patriotz said...

Second, its pretty pointless to compare unleveraged long term real estate with stocks.

Why not? Compare unleveraged with unleveraged, leveraged with leveraged. It's totally bogus to compared returns with leverage on one asset to returns unleveraged on another asset. Any asset may be owned with or without leverage, with the associated risk.

Fully paid up re at todays' Vancouver prices probably returns 3.5% without taking into account capital gains.

Net yield of 3.5% today? Baloney.

Factor in leverage and its not uncommon to get returns of 600% on investment properties.

You forgot to put "plus or minus" in front of that number.

Unknown said...


Its been a while since I've been back, so I missed your comment. If you doubt the 600% drop me a line and I'll give you the addresses. You can do the research and math yourself.