Which is the Better Option For Today’s Investors: Stocks or Florida Real Estate?

The pig will only get you so far.

Investing is an important part of building wealth and ensuring long-term fiscal security. Are you considering investing in real estate? You are certainly not alone.

A legion of Florida real estate investors have played a huge role in the surging housing market. But, with recent doubts lingering over the market’s future, is real estate a better bet than traditional investment options such as stocks? Matt Krantz, a financial reporter for USA Today, takes a look in today’s edition.

Investments are like fads. Some are irresistible, then fade away. Others stick around for the long haul. For whatever reason, certain investments get so popular after performing strongly for a long period of time that every investor must have them. There have been times in our economy when people were only interested large-company stock, Internet stock or, in today’s environment, real estate investing.

The housing boom has been so strong that in some cases, such as the Broward County real estate landscape, you need to earn nearly $100K a year to buy a house. Some South Florida median home prices have appreciated by as much as 44 percent a year in certain metro areas. Yet the doomsday predictors say it cannot last, so we can only look at the big picture. Let’s take a look at what has done better over past 10 years — stocks or real estate?

Let’s start with a breakdown of the IFA Total U.S. Market index, which measures the value of the stock market, and the corresponding IFA Real Estate Securities index between January 1, 1996 and January 31, 2006. This analysis shows just how much real estate investments (in this case real estate investment trusts), have blown away stocks in the past decade.

• The IFA Real Estate Securities index gained 15.76 percent annually, on average, for a total gain of 338 percent.
• That beats the 8.93 percent annualized, and 132 percent total return, of the IFA Total U.S. Market Index by a landslide.

As if that weren’t enough, real estate has actually been less risky.

The IFA Real Estate Securities index had a (standard deviation) risk of 13.58 over the time period, which is a good amount below the 16.27 risk of the IFA Total U.S. Market index.

Another way to compare the two options is to study the median price of existing single-family homes. Data used by the National Association of Realtors tells a much a different story. The median price in the U.S. was $208,700 last year, an increase of 12.7 percent from 2004. The median price at the end of 1995? Just $110,500.

• That seems staggeringly high, but do not be misled. It equates to a compounded average annual growth rate of 6.5 percent.
• By contrast, the annualized return of the IFA Total U.S. Market index was higher at 8.9 percent.

Therefore, home price appreciation doesn’t always beat stocks.

Stocks tend to outperform home price appreciation most of the time, in fact. You’re better off owning an assortment of many real estate assets, such as a real estate mutual fund, than a single property in an area that might not appreciate. Diversification is the key. Forget about bubbles and trying to “time” the market. Real estate can be a valuable addition to many investors’ portfolios, as it often rises when traditional stocks and mutual funds stumble.

Basically, by owning real estate and stocks, you can increase expected returns on your portfolio and lower your risk. The debate isn’t whether you should own stocks or real estate. You should spread your money amongst both. In Florida, inventory levels and higher Florida home loans have lowered projections for real estate this year, but over the long haul, the state isn’t going to get any less popular.

Diversify and invest away.