Apples to Oranges

Yes, the whole saying "it's like comparing apples to oranges!" is overused like our friends "what haaaappens in Cancun, staaaaaays in Cancun" and "I can sense when people are gay, I call it Gaydar" but I need this saying now to help make my point.

I just read another article comparing stocks to real estate, this time by Forbes. The headline reads something like "Stocks or Real Estate? Which one is a better investment??" Real estate has become the new 'chic' investment of choice. I blame Trading Spaces and its clones. My problem with such articles is that they cater to these dumb trendy people who want a simple answer as to which is better, using simple numbers. The article provides that much coveted useless simplicity.

The article claims real estate is better in the short term because housing prices rose 56% in past 5 years while the S&P 500 went down 6%. It then goes on to say "But if you take a longer view - say, 25 years - you'll find that the S&P 500 has actually stomped the real estate market, from Boston to Detroit to Dallas. From the start of 1980 to the end of 2004, home sales prices increased 247%. A pretty sweet deal, it would seem. Over the same period, however, the S&P 500 shot up more than 1,000%."

Aw, simple easy numbers. 1,000 is better than 247, so stocks are better than real estate. Look at that orchard of apples to apples. No. Let me ask you Mr. Forbes, how many people pay 100% of the price of their homes? Maybe like one out of every 500? Most people get a thing called a mortgage, where you put down 10% of your own money and leverage the rest. And it's relatively easy to get a mortgage because it's a reasonably safe investment. Try to get a bank to lend you $300,000 so you can buy a bunch of stocks, no one will do it. Why? Because any particular stock can be worth zero tomorrow. Not so with houses.

So if these MBA's at Forbes use this difficult concept of leverage, they'll see that the guy who puts down $10,000 on a $100,000 house in 1980, his house will be worth $247,000 (247% increase) in 2004. Assuming he rented it out and broke even with mortgage payments etc, he can sell the house at a gain of $212,000 (consult an amortization table to see how I came up with that number). His investment has increased 2,120%, not 247%. You pay 10% of the price but get all the profit. 2,120 is better than 1,000.

But that's ok. As I said earlier, there are too many people playing around in real estate right now. I hope stocks do well so people forget about real estate and I can swoop right in. Stay tuned for details.