Real Estate Transactions Costs Vs. The Stock Market
One thing that usually gets ignored in comparing real estate to other forms of investment is the huge transactions costs (money and otherwise) associated with real estate.
Not only do you have to pay 6% (or whatever) to an agent (unless you want to sell it yourself, which means a huge time investment) but Ardell at RCG has a posting today which begins: "Getting a property ready for market is often a monstrumental (sic) undertaking for homeowners." She goes on to note that: "More often then not, when people expend more effort than they ever thought possible by the time the house is "ready", they want to raise the price to include a cost for "all the work" they've done. Forgetting that the work was needed to get the house UP TO the asking price in the first place."
If I want to sell a mutual fund, I don't have to spend days "preparing the mutual fund for sale".
Bottom line: even if housing goes up by 10% in a given year, and stocks go up 6%, that does not demonstrate that housing is the better "investment". In a bubble, housing may look great, but in normal times, where housing and other investments provide similar returns, excessive transactions costs really devalue housing as an investment.
Not only do you have to pay 6% (or whatever) to an agent (unless you want to sell it yourself, which means a huge time investment) but Ardell at RCG has a posting today which begins: "Getting a property ready for market is often a monstrumental (sic) undertaking for homeowners." She goes on to note that: "More often then not, when people expend more effort than they ever thought possible by the time the house is "ready", they want to raise the price to include a cost for "all the work" they've done. Forgetting that the work was needed to get the house UP TO the asking price in the first place."
If I want to sell a mutual fund, I don't have to spend days "preparing the mutual fund for sale".
Bottom line: even if housing goes up by 10% in a given year, and stocks go up 6%, that does not demonstrate that housing is the better "investment". In a bubble, housing may look great, but in normal times, where housing and other investments provide similar returns, excessive transactions costs really devalue housing as an investment.
Comments
It is true than I could buy stocks on margin too, but that seems like a riskier endeavor, with much higher interest rates and no favorable tax treatment.
I would not suggest buying a house for investment purposes today, because I don't believe values will go up. Stocks seem a better investment to me. But there are structural advantages to real estate if you believe values will go up.