Returns on Real Estate Compared to Stocks

A couple of weeks ago, we compared the average returns on various types of stocks and bonds. Today, we will talk about things that might be of especial interest to all our listeners. The subject will be real estate, and its returns compared to those on stocks.

We have all heard about the incredible rise in real estate prices over the past several years. But we already know that results from “several years” are not indicative. Fortunately, within the framework of one of our government’s department, the Department of Housing and Urban Development, there is a so-called Office of Federal Housing Oversight, which has been collecting data on US real estate prices since 1975, i.e. for 31 years. Now, this is something. This data is used to build an index, which is called the HPI, or the House Price Index. This is the index of single-family home prices. It is collected for every state, averaged for the whole country, and also calculated for the nine regions into which the United States is commonly divided. It is also gathered for certain major cities and suburbs (the so-called major metropolitan areas).

We of course know that individual home prices go up at different rates (all we need to do is recall the real estate agent’s mantra: “location, location, location”). Nevertheless, averaged figures represent a good indicator of what is happening to the real estate market in the country as a whole.

Let us begin with the large regions. The fastest growth was seen in the so-called Pacific region (it is made up of California, Washington, Oregon, Alaska and Hawaii). Over 31 years, prices for single-family homes in this region grew by a factor of more than 13. This sounds very impressive, but if we translate it into average annual growth, we will get the far less remarkable figure of 8.7 percent. New England was next (Massachusetts, Connecticut and four other states). Here, prices saw nine-fold growth, which means that on average, prices grew by 7.5 percent a year. Next – the Mid-Atlantic states: prices there grew by a factor of almost 7.5, or 6.7 percent a year. Intuitively, would have guessed as much: prices should grow faster on the two coasts than in the heart of the country. After that comes the so-called Mountain region: those prices grew by a factor of 6.7, or 6.35 percent a year. Our Illinois is part of the Northeastern Central region, which ended up in fifth place: over 31 years, prices here grew by an average of 5.3 percent a year. And in last, ninth place – the Southeast Central region (Louisiana, Arkansas and the neighboring states), where prices grew by an average of 4.3 percent a year.

On average for the country as a whole over 31 years, the price of a single-family home grew by a factor of 6.4, or about 6.2 percent a year. And what happened to the stock market over that span? It turns out that over the same period, prices on stocks rose by a factor of about 48, and on average gained 13.3 percent a year, i.e. they grew more than twice as fast as house prices!

It is further interesting to compare the growth of real estate prices with the level of inflation. The period from 1975 includes the end of the 1970s through the early 1980s, when inflation was high. The average inflation rate between 1975 and 2006 was 4.2 percent, i.e. slightly higher than the average for the past 80 years. Thus, in terms of real (excluding inflation) returns, real estate grew slower than two percent a year, while stocks (in real terms) gained an average of 9.1 percent.

You could say: “But these are average figures. Prices grow much faster in certain cities!” Let us take a look then at how housing prices grew in some of the major cities. Let us begin with Chicago: over 31 years, prices grew by a factor of about 6.6, for an annual average of 6.4 percent, i.e. very close to what was happening in the country as a whole. New York prices grew slightly faster: on average, by 8.5 percent. In Boston, faster still – by nine percent. And in Miami – slightly slower than that, for an average of 7.5 percent. Los Angeles grew faster than Boston: by an average of 9.25 percent. But again, the rise in real estate prices is much smaller in these cities than the gains made by stocks, which we already mentioned grew by an average of 13.3 percent a year between 1975 and 2006.

This data confirms that stocks, on average, grow much faster than real estate prices. Of course, we use housing not only as (or so much as) a means of investment. And of course, with uneven growth in real estate prices, on rare occasions individual homes do grow faster than stocks. On the other hand, some stocks grow faster than any homes: over the past 14 years, stock of the renowned Starbucks company grew by a factor of 54, or an annual average of 33 percent. This of course does not mean that it will continue to grow as quickly, but houses do not multiply in value by a factor of 54 over 14 years.

On our site, you may read the full text of this segment. The document presents data for each state. California is in first place (with average annual growth of 9.2 percent), Illinois – in 26^th place (5.6 percent), Mississippi – in last place, with 3.75 percent, i.e. in Mississippi, prices grew slower than the rate of inflation.

With this, we will draw today’s program to a close. This was Sergey Zaks. Thank you for your attention and until next time.

Appendix 1.

Real Estate Prices
Regional Summary: Q1 1975 - Q1 2006

Source: The Office of Federal Housing Enterprise Oversight, The Federal Reserve Bank of St-Louis, Zaks Investment Advisory Service, LLC

Appendix 2.

Real Estate Prices
Major Metropolitan Areas

Source: The Office of Federal Housing Enterprise Oversight, The Federal Reserve Bank of St-Louis, Zaks Investment Advisory Service, LLC

Appendix 3.

Housing Market in Individual States

Source: The Office of Federal Housing Enterprise Oversight

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