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quest

Ask Julie

Real Estate or stocks?

By Julie Stav

Remember the late 90s? Millionaires were made, practically overnight, just by choosing to buy shares of one of the many dot.com companies on the menu. And what can you tell me about the stories we heard of home purchases that tripled in value just as recently as two years ago? Incredible!
But we all know that what goes up must come down, so, after the dot.com bust of the year 2000, when the stock market came tumbling down, and the real estate crash this year, does it really make sense to invest in either one? And if it does, which one?
To answer that question, let’s first take a look at your previous investment decisions. If you invested in an index fund that buys shares of Standard & Poor’s 500 stocks right after they peaked between 2001 and 2006, the return on your investment would average approximately 4 percent per year. But if you invested your money in real estate during the same period, according to the S&P/Case-Shiller U.S. Home Price index, which measures residential housing in 20 metropolitan regions, you would have seen the value of your home increase at a whopping rate of 12.4 percent each year! Confusing? You bet!
Over the long run, stocks win the battle in performance. If we take a longer investment horizon, let’s say between the years 1974 and 2004, real estate generated a yearly return of 8.6 percent, compared to a very impressive annual return of the S&P500 index of 13.4 percent during the same period.
According to Professor Robert Shiller, author of Irrational Exuberance, the real estate market has only produced extraordinary returns twice: right after World War II, as a result of soldiers returning home and starting their families, and the recent bubble that occurred between the years 1998 and 2005.
But performance is only part of the whole investment story. There are additional factors when comparing two investments that are completely different in nature. Stocks come out the winners in some of them, but real estate investments take the lead in others.
Costs: The average cost of an index fund is .09 percent of assets a year. Compare that to the cost of closing your loan (estimated at 2 to 4 percent of the purchase price), the commission to the agent (3 to 6 percent), and the cost of moving. It is estimated that when all is said and done, buying and selling a property could cost you as much as 10 percent of the price you paid for it. This means that your property needs to appreciate by 10 percent before you break even! Add to that the costs of maintenance, insurance and taxes, etc.
Taxes: Here the tables turn in favor of real estate. You can buy and sell your home, walking away with a profit of as much as $500,000 (if you file your taxes as married joint), and not have to pay one cent to Uncle Sam for your gains. The best stocks can offer you is to offset your gains with any losses you may have suffered and pay taxes on the difference. If you held the fund longer than one year, your tax liability would be a maximum of 15 percent.
Liquidity: By law, a mutual fund must send you your money within 24 hours after they receive your notification of withdrawal. You may incur penalties on some funds that have what is called a back-end-load (where you pay a percentage of the amount you are withdrawing), but you have access to your money in a matter of days. Real estate, on the other hand, buries your money. Home equity lines of credit made it easy to access the equity in a homes, but it still involved going through a loan process and the fees that were associated with it. Score one for the stock market.
Volatility: While selling a mutual fund can take place many times by simply making a phone call, buying or selling real estate involves a much slower ceremony. This process tames volatility. But your $3,000 investment in an index fund spreads your risk among 500 companies, while buying a home puts all your eggs in one basket. Remember the property values in Texas during the oil meltdown? I would call this one a draw.
It really comes down to how much money you have to put down, how much capital you have for reserves and how long you are willing to keep your investment. My answer to the question of real estate vs. stocks? Buy a home, enjoy living in it, but stake your future in stocks.

Listen to Julie Stav’s
radio program Monday through Friday on your
local Univision radio station. For more information visit www.JulieStav.com.