Over the long term, the stock market outperforms the value or real estate considerably. A $100 investment in the average home (as tracked by the Home Price Index from the Federal Housing Finance Agency (FHFA)) in 1975 would have grown to about $500 by 2013. A similar $100 investment in the S&P 500 over that time frame would have grown to approximately $1,600.
When you look at shorter time frames, you can see a very different story. In 2008 into early 2009, the housing bubble popped and real estate valuations plummeted. The stock market crash too. In 2008, the S&P 500 index ended the year 37% below where it had started. So what’s happened lately; real estate or the stock market? The stock market has bounced back. Since March 2009, the stock market has been on a tear. How about real estate?
The chart below compares the price appreciation of real estate in various parts of the country against a median financial portfolio. (It’s unclear why the median investment portfolio isn’t consistent regardless of where you live, perhaps there are local municipal bonds included in each portfolio.)
In all but four cities, not surprisingly, real estate has lagged the stock market. While this may sound like an argument for investing solely in the stock market, there is one factor that has to be considered; you have to live somewhere. If you put all your money in the stock market, you may end up living in a substandard situation. A portion of your cash has to go into where you live.