Is Real Estate Still The Best Long-Term Investment?

David McNew/Getty Images

David McNew/Getty Images

Real estate is one of those enduring investments that people believe they can (almost) always rely on. Owning your own home, for instance, has long been considered a fundamental component of achieving the American Dream, while stocks and mutual funds can be stigmatized as being too unreliable. Real estate investing took a hit during the housing crisis years between 2007 and 2009, but new research shows that Americans are beginning to warm up to the idea of long-term investing through real estate.

What many Americans don’t realize about real estate investment, however, is that it’s actually a lot more complicated than investing in stocks and bonds. Further, real estate doesn’t offer the kind of return on investment that many Americans assume it does. Robert Shiller, an economist most famous for co-creating the Case-Shiller housing index, said in an interview with Fortune magazine, “..home prices look remarkably stable when corrected for inflation. Over the 100 years ending in 1990 – before the recent housing boom – real home prices only rose 0.2 percent a year, on average. The smallness of that increase seems best explained by rising productivity in construction, which offset increasing costs of land and labor.”

David Reiss, a professor of law and the research director of the Center for Urban Business Entrepreneurship at Brooklyn Law School, agrees. “Some people buy real estate expecting it to appreciate a lot over time,” he said, in an interview with USA Today. “But it can be risky – or even foolish – to pay so much for a property that you’re losing money on an operating basis just because you think it will appreciate.” In fact, when adjusted for inflation, as Shiller suggests, the average house hasn’t appreciated much at all since 1987.

In contrast, the S&P 500 has produced an inflation-adjusted annual return of 6.53% since 1929. Even investing in government debt would have resulted in returns of about 3%. Further, the Gallup survey indicates that wealthy Americans, more than any other income group, are more likely to choose stocks as a long-term investment vehicle over other options such as real estate or gold, presumably because investing in stocks is the easiest way to become wealthy yourself. This year, wealthy Americans were even more convinced of stocks efficacy as a long-term investment than in years past. In 2015, of those Americans surveyed whose annual income exceeded $75,000, 38% said that they believed stocks were the best long-term investment available, compared to 30% in 2014.

Yet despite the research indicating that real estate isn’t the stellar long-term investment so many believe it to be, a recently released Gallup poll found that Americans are more interested in real estate now than ever. 2015 marks the second straight year that Americans of all income levels have voted real estate above stocks, gold, and savings accounts as the best long-term investment available, according to Gallup. Thirty-one percent of those surveyed chose real estate as their go-to long-term investment, with stocks and mutual funds following behind, with 25% convinced of their long-term investment potential.

What is the point of investing in real estate, then, if houses don’t actually appreciate that much, if at all? Well, as Entrepreneur magazine points out, real estate can be a blessing for those who struggle with savings. For those people, buying a rental property (or properties) can act as a kind of sideline retirement plan that you are required to commit to, month after month.

The moral of the story is that as alluring as it may be to own property, the reality is that not much can replace the stock market when it comes to making real, tangible returns on your investment, though real estate does have its benefits. From utilizing rental properties as a kind of extra retirement income, to taking advantage of the added opportunities for tax deductions that come with owning property, real estate certainly isn’t a worthless investment, but it is worth researching to be sure you don’t have unrealistic expectations for the kind of return you’ll be getting.

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