Myth Busters: Stock Market Outperforming Real Estate Since 2011?
November 14, 2018
Real estate and the stock market are often compared to each other, mostly because they are the two most common places for people to invest their money. However, simply comparing growth in home prices to that of the stock market is problematic when trying to determine which is the better investment, as it doesn’t paint a complete and accurate picture.
Take, for example, a recent Business Insider blog titled, “Is buying a house a better investment than the stock market? We did the math, and the answer is clear”. In it, they charted home prices against the S&P 500 at various points throughout the housing crisis until now in order to demonstrate that stocks have consistently outperformed real estate.
Since May 2011, which roughly marks the beginning of the housing market recovery, home prices are up 48%, while the S&P 500 has shot up 99%. That means the house you bought for $1 million in 2011 is now worth $1,480,000, and the $1 million you invested in stocks around the same time has nearly doubled. These numbers alone would certainly seem to support the Business Insiders’ claim that stocks are the better investment, at least over that specific period of time. But they‘re forgetting one very important detail…
Buying a $1 million house doesn’t cost you $1 million. Assuming you paid a 20% down payment, it only cost you $200,000 initially. So that $480,000 of equity you’ve built up over 7 years since 2011 is actually a 240% increase on your initial down payment. Even after factoring in 7 years of an estimated $4,500/month in mortgage, property taxes and insurance, the $578,000 total that you have invested into your home has yielded an 83% return. Also, let’s not forget that in the 7 years of having the $800,000 mortgage – you would have paid down roughly $115,000 of principal. So while It cost you $378,000 in payments, $115,000 of that reduced debt…thus creating more equity. So the value grew to $1,480,000, but the debt shrunk from 800k to 685k. Therefore your $200,000 down payment plus your $378,000 in operating costs yielded $795,000 in equity. That’s 137% return over 7 years. Further, if you’ve been operating this home as a rental property, that extra $378,000 you’ve spent on operating costs was likely recouped by the rental income you’ve collected, as well as the tax advantages you’ve benefited from.
The important take away here is the evaluation of real estate and stock as investment options doesn’t come from a simple appreciation rate. Deeper and more detailed analysis should be done. And sometimes, it just comes down to what investments you enjoy following. Clearly, I think real estate is more fun…. Karen and I have been at it for 25 years with no intention of stopping!