Why housing is everyone’s favorite investment

Every year since 2011, Gallup has asked people what they think is the best long-term investment:

After a brief love affair with gold, real estate has topped every year since 2013. Stocks are a distant second.

So why do we Americans love the real estate market so much from an investment perspective?

There’s something about the American dream of home ownership combined with the size of the price tag definitely involved. A home is both the largest purchase and the largest financial asset for most households.

You could say it’s the bull market we’ve experienced since the pandemic, but housing was at the top of the list for many years before the pre-Covid era.

The strange thing is that real estate recovered pretty quickly on this list from the biggest real estate crash we’ve ever seen.¹ I would have thought that more people would have been scarred for much longer from the accident. The stock market bottomed out in 2009, but home prices continued to decline through 2012.

Much of this has to do with the nature of housing market prices.

It is an illiquid asset. You can’t see the tick-by-tick price changes like you do on the stock market. There is not nearly as much volatility in house prices.

We used Robert Shiller’s historical home price database to calculate the national annual returns since 1950:

Look at all the green there. Housing prices rarely fall.

By my count, there have only been seven down years for the US housing market in the last 75 years. They are losses only 9% of the time. And five of those seven years happened after the housing bubble popped.

The stock market has been negative annually 22 percent of the time since 1950. But there have also been 32 double-digit declines in that time. Ten of those 32 declines were bear markets (down 20% or worse), while there were six outright crashes (down 30% or worse).

The real estate market has dipped a few times and crashed only once in the last 75 years.

Even if house prices were more volatile, you wouldn’t notice because it’s an illiquid asset. It’s out of sight, out of mind.

I am not arguing that housing is a better investment than stocks, gold, bonds, crypto or anything else.²

For certain investors, real estate can be quite profitable. For others, it can be an albatross.

A lot depends on location, timing and luck.

Plus you have all the ancillary costs – property taxes, insurance, maintenance, renovations, real estate agent fees, closing costs, moving costs, etc.

No one keeps track of these costs. Plus, you have to live somewhere, and there’s usually leverage involved, so it’s nearly impossible to calculate the real return you get from home ownership.

Most people just take the price they paid and subtract it from the price they’re selling it for or the current Zillow market value and call it good.

The housing market has been good for homeowners over the last decade or so. I personally have been very lucky in the real estate market.

But just because housing has been good over the past decade doesn’t necessarily mean I think it will be the best performing asset class going forward.

The good news is that you don’t have to pick just one asset class to invest in at current levels.

Life doesn’t work like a poll or a guess.

You can split your bets between housing, stocks, bonds, cash, gold, crypto or anything else that takes your fancy.

Diversification takes extremes out of the equation.

Further reading:
What is the historical rate of return on housing?

¹I wouldn’t argue with you if you said the Great Depression was worse, but housing wasn’t seen as a financial asset back then like it is today.

²I wrote about the bull and bear case for housing here and here.