Housing Vs. Stocks and Long-Term Appreciation

Your house can be a costly, underperforming investment.

Your house can be a costly, underperforming investment.

The largest single investment for most Americans is a home, and that is followed by the money invested in stocks through a 401(k) or another retirement account. There has been continuing speculation about whether housing or the stock market provides better long-term returns. At times, such as the period from the late 1990s into the second quarter of 2006, residential housing outperformed the stock market, but over the long term, stocks are better investments.

The Housing Boom

From the late 1990s through early 2006, U.S. housing prices soared. For the six-year period ending Dec. 31, 2005, the Case-Shiller Housing Index shows real gains in housing after accounting for inflation of 8.22 percent. For the same period and again accounting for inflation, the return on investments in S&P 500 stocks was -3.68 percent. Clearly, during this period U.S. residential housing significantly outperformed the U.S. stock market.

The Great Recession

Following the housing boom, both housing and stocks nearly collapsed, and the United States entered a severe recession, with a slow recovery beginning in mid-2009. In the four years that followed, housing recovered only slightly. In early 2013, the Case-Shiller index stood at 136.70, still more than 50 points below its 2006 high-point. Over the same time-period, the S&P 500 moved up another 300 points to about 1600.

Longer Views

Accounting for inflation, real returns from investments in housing from 2003 to through 2012 equaled -1.79 percent. After accounting for inflation, the gain in the S&P 500 for the same period was 4.58 percent. Over that period, the apparent investment superiority of housing during the early 2000s disappears. Comparison of the two markets in any 10-year period over the last 70 years shows that in every period stocks did better than housing.

The Longest View

Over the longest historical period, the stock market looks even better and the housing market looks worse. Data collected by Global Financial Data and quoted by The Financial Advisor shows that over the last 123 years the annual return on housing, accounting for inflation, was 0.18 percent, while the return on the S&P 500, again accounting for inflation, was 6.03 percent.

Shiller's Conclusion

Yale economist Robert Shiller thinks stocks will continue to outperform housing for the foreseeable future. Interviewed in early 2013 on the financial news channel CNBC and asked which investment -- stocks or housing -- he favored going forward, Shiller responded, "If it's just an investment, I would say the stock market. Stocks for the long run -- the two-century-long history -- show a lot of amazingly good performance for stocks. Maybe it won't be that good in the future, but I bet it's better than housing."

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