“Real estate is very popular as an investment because it is very easy to understand,” said Arvin Sahakian, vice president of mortgage site BeSmartee. “It is tangible, and therefore even the novice investor feels safe with such investments.”
More than a quarter — 27% — of Americans who had money to invest for a decade said they would want to put the funds into real estate, according to the finance site Bankrate’s annual long-term investment study. Following close behind, 23% said they would invest in cash, and 17 percent picked the stock market. Interestingly, households headed by college graduates are the only group to prefer stocks.
But is real estate the best place for money for more than ten years? The Bankrate study points out the S&P 500 has risen 27% through the past two years — but Americans are only three percentage points more likely to choose stocks now than they were in 2013.
“Over the long-term, real estate has really not been a particularly good investment, at least compared to the stock market,” said Robert Johnson, president of The American College of Financial Services. “The ‘real’ return — that is, after adjusting for inflation — has been negligible and substantially less than the stock market.”
Johnson pointed to economist and Noble laureate Robert Shiller, who noted that over a 100-year period, the real return on real estate was only about 0.2% annually. Contrast that with the real return on an index of large capitalization stocks being 7.2% from 1926 through 2014.
“Americans are drawn to real estate, because they see that over the long run, it has appreciated in value — and, over the long run it certainly has — but much of that appreciation is illusory as it is masked by inflation,” said Johnson, adding the bias toward investing in real estate likely comes from the fact a person does not get a market quote on what their house is worth every day.
A lack of understanding also may be what makes cash people’s second favorite long-term investment, said Tyler Linsten, founder of Alder Grove Capital in Seattle.
“Most people don't know what to do with excess cash in the first place,” Linsten said. “Individuals are either priced out of investment advice or they don't trust the reputation of investment advisors as a group.”
He added many people hold cash, because it allows them to make impulsive decisions — instead of doing the more disciplined of looking and investing for the long term.
“If an investor holds stocks or bonds, they are much less likely to make an impulsive purchase or commitment with that money since it has a longer term purpose,” Linsten said.
However, some think it may be cash that is influencing the current real estate market and causing people to invest in it.
“The recent rise in property values is being fueled by something different than the previous bubble,” Sahakian said. “This bubble seems to be fueled by investors buying with cash or large down payments, and well-qualified home buyers with verifiable income and assets.”
Sahakian said the previous bubble was fueled more by subprime loan products and very relaxed underwriting policies, making this rise — which may see somewhat of a correction — more stable.
“I would expect a slight correction when borrowing rates go higher, but expect the decline to settle quickly thereafter,” Sahakian said.