Long-term returns from real estate

[wabmester]

In another thread, somebody reposted a posting from somebody on some other board, and one of the points was that long-term returns from real estate hasn't been good.   I've never seen any data to support that view.    So, here's the first thing that google came up with on the subject:

From A Perspective on Long-Term Real Estate Returns

Cap-weighted US annualized returns by decade (based on research by Dimson):

1926-1929: 11.9%
1930-9: 8.1%
1940-9: 13.7%
1950-9: 6.2%
1960-9: 6.5%
1970-9: 10.1%
1980-9: 11.1%
1990-9: 5.5%
2000-2: 8.4%

In another report, they project 10-year annualized returns for various asset classes.

US Stocks: 7.3%, SD = 17.8%
Real Estate: 9%, SD = 13.1%
Bonds: 4.4%, SD = 6.5%

 

[mathjak107]

real estate is very localized as far as returns,,,i got to agree though here in queens ny one of the boroughs of new york city its been pretty sucky.....i got my house in 1987 at 235,000 ..it fell after the market crash down to 169,000...i sold it a few years ago for 335,000;.most of the gains we got are recent ...i also bought a co-op here in new york in 1988 for investment....its now worth 160.000 or so 19 years later..... the exceptional area is manhattan..my wife is partners in an llc she inheireted in co-op apartments in a prestious nyc building overlooking central park.....we sold 4 of the 8 we own for between 1.1 and 2 million each...incredible money......

 

[Nords]

Cap-weighted US annualized returns by decade (based on research by Dimson)

If that's the same Dimson that wrote "Triumph of the Optimists" then he probably knows what he's doing. Or at least no other researchers are willing to abandon their families and lifestyles to accumulate and sift through such a huge steaming pile challenge the validity of the data.

Seems that real estate, or at least the value of the land, is roughly tracking inflation.

I wonder what the standard deviation was or what the bell curve looks like or how it breaks down regionally. In its current form, this data is only useful to nationwide REIT investors.

 

[tryan]

one of the points was that long-term returns from real estate hasn't been good.

Yes, sure, if you only look at appreciation. Add rental returns and you get a different story.

Skipping rents is like skipping stock dividends.

 

[Craig]

Location, location, location for sure.  We've done much, much better than the inflation rate, and been able to tax shelter the gains and much of the income ... while putting a roof over our heads.

We bought two acres in Paradise Valley, AZ in 1991 for $180K, added $150K in improvements, sold for $1.15M in 2003 ... would have done much better to hold another two years, but who knew.  An 11% CAGR, and that ignores the market rents we avoided by living in the home ... an important fact (and if you present value that back, our investment drops to almost zero, driving the CAGR incredibly high).  Location.

We roll the gain, via 1031 (not possible with most other investments) into income-producing real estate ... a $260K Scottsdale home is now valued north of $475K, and a $260K Portland home is valued at $350K.  Those rentals, along with a condo, yield 15%+ cash-on-cash net rentals ... covering our basic principal residence expenses easily. Location.

OTOH, we bought a Plano, TX home in 2003, sold it in 2004 and took a small loss.  Our DFW friends, holding much longer, also had poor returns ... too much private land available, too-high real estate taxes, so-so economy.  Location.

I don't know any of my friends and acquaintances who cannot cite real estate as being an important component and builder of their net worth.  It may be illiquid (think HELOC), high transaction costs (do some yourself), and it is tied to local conditions. 

The tax benefits are huge, BTW ... we intend to keep moving gains around tax-deferred for the rest of our lives, and in some cases ditching the taxes completely by converting some parcels into principal residences. And, if we plan properly, our heirs will get a basis step-up at our deaths, and the income taxes will never come due. Nice feature with real estate.

I know many more people who have had great returns on real estate than I know people who made like returns on any other asset class.

 

[wabmester]

Location, location, location for sure.

Well, I think a better message would be diversification, diversification, diversification.

If you pick individual stocks, you can do great or poorly, just like individual real estate investments. But it looks to me like a broad real estate portfolio would give you stock-like returns, much higher dividends, lower volatility, and very little downside risk compared to stocks.

What I also find interesting about this data is that the worst period in history for real estate was the RE recession of the late 80's and 90's. That tells me that a lot of the recent surge in prices we've seen has been due to upward reversion to the mean.

 

[Nords]

Most of the diversification & retirement calculators don't have enough international, REIT, or commodities history to include their effects on a portfolio. So to some extent, anyone investing in these asset classes is exploring unknown territory. It's interesting that Financial Engines confidently presumes to declare the volatility of a portfolio that includes these assets, but that's based strictly on whatever price history their Monte Carlo simulation starts with.

What I also find interesting about this data is that the worst period in history for real estate was the RE recession of the late 80's and 90's.    That tells me that a lot of the recent surge in prices we've seen has been due to upward reversion to the mean.

Let's not forget that little foreclosure festival known as the Great Depression... I doubt the records reflect its reality. There was a pretty big historical demographic change starting with Levittown and Sun City, too.

And today's homes have gone through a few hedonic adjustments from the places we grew up in!

But I believe that you're right. Local professors are claiming that housing costs are still not that much changed from their percentage of median income over the last 15 years, which started with a spectacular bubble blowout for 10 years followed by the recent resurgence.

 

[mathjak107]

looking at that chart of real estate returns its to difficult to interpret what those returns represent. real estate is very localized and appreciation varies widley. its not like the s&p 500 indx which has same meaning across the country . its really meaningless

 

[wabmester]

looking at that chart of real estate returns its to difficult to interpret what those returns represent. real estate is very localized and appreciation varies widley. its not like the s&p 500 indx which has same meaning across the country . its really meaningless

Err, they tell you the returns represent a cap-weighted sampling of US real estate. So, it's pretty comparable to the S&P 500, which is a cap-weighted sampling of US stocks.

 

[mathjak107]

the s&p is a standard index known by all, and valued the same every where. it consists of the same stocks priced the same every where. an index of real estate pricing put together is very different depending on the area they used and not knowing that info that makes up their index its not very useful

 

[wabmester]

the s&p is a standard index known by all, and valued the same every where. it consists of the same stocks priced the same every where. an index of real estate pricing put together is very different depending on the area they used and not knowing that info that makes up their index its not very useful

Well, I think that's the reason most investors have a bias towards stocks. There's a ton of historical data about US stock returns. To say that historical return data on US real estate "is not very useful" simply because it's not as standardized as stock data is missing the point.

Even without an official index, like the S&P 500, shouldn't it be pretty obvious that real estate returns are pretty good and more stable than stock returns? Most of the RE returns come from an income stream, rather than capital appreciation, and that's what makes them stable.

All you need is a cap rate of 6% + real appreciation of 2%, and you're doing better than the historical (and volatile) 7% real returns from stocks.

 

[ats5g]

Even without an official index, like the S&P 500, shouldn't it be pretty obvious that real estate returns are pretty good and more stable than stock returns? Most of the RE returns come from an income stream, rather than capital appreciation, and that's what makes them stable.

NCREIF puts together quarterly and annual returns for real estate by region and state for 1978-2006, which were in the first article.

Like RE, most of the returns from stocks came from dividends and earnings growth, not capital appreciation:

IMO, one of the problems with RE return data is that the much less frequency of trading [i.e. marking to market] as compared to stocks and bonds, makes RE seem much more stable. Especially since much of the RE data, like from NCREIF are appraisel based and not transaction based. However, this does not necessarily mean that RE returns are not less volatile than stocks.

- Alec

 

[honobob]

In another thread, somebody reposted a posting from somebody on some other board, and one of the points was that long-term returns from real estate hasn't been good. I've never seen any data to support that view.

* In general housing prices have historically risen at close to the rate of inflation. So, even a period of flat growth over a number of years could bring prices back in line with the historical trend. Real Estate: 9%, SD = 13.1%

 

[wabmester]

honobob, how've you been?

Just so there's no misunderstanding -- I like both stocks and real estate as asset classes. But I didn't like stocks much in 1999.

And I don't like residential real estate now.

 

[dmpi]

Today's average house is much larger than the average house in the 50s.
If you try to sell a 50's house with no improvements your not going to get today's average price. I don't think that graph takes that into account.

 

[mathjak107]

i think when it comes to real estate its a very personal thing unless you are involved in a huge partnership or un-traded reit. the only thing we can judge by is our own returns on what we own and even thats tricky.
we generally buy real estate leveraged but most of us dont buy stocks on margin so its important to compare apples to apples. lets talk new york- queens

my own case is my stocks are up over 10x since 1987

my house was 165,00 in 1987 after the dip and 235,000 before and 450,000 today

a co-op i bought in 1987 as an investment was 73,500 , fell to 54,000 after the dip and today 150,000


manhattan co-0ps over looking central park which we still own were 200,000- 250,000 in 1987 today 1.3-1.5 million


as you see these are actual geographical returns on property we own or owned and even they vary greatly in a hot city like new york city depending on what and where the real estate is.

 

[saluki9]

Today's average house is much larger than the average house in the 50s.
If you try to sell a 50's house with no improvements your not going to get today's average price.

HA! Come to my neighborhood! You can sell your crappy non-updated. avacado green kitchen, one car garage ranch home for $600K

Sorry, just a cynical young house hunter looking for his first single family home

 

[Mr._johngalt]

HA! Come to my neighborhood! You can sell your crappy non-updated. avacado green kitchen, one car garage ranch home for $600K

Sorry, just a cynical young house hunter looking for his first single family home

Yep, and in my neighborhood (gorgeous by Illinois standards), waterfront
homes (cottages) can still be had for under 100K. Location, location........

JG

 

[tryan]

my own case is my stocks are up over 10x since 1987

my house was 165,00 in 1987 after the dip and 235,000 before and 450,000 today

Interesting ... In my case it's the exact opposite. RE is up 10x. 401k from mega corp up 3x.

It's all about the buy ... bought low (some at RTC/HUD auction; all were REOs) held 10+ years. Hence the great return. Same could be told for some stocks.

 

[rmark]

Individual properties are the real estate version of individual stocks. Just as individual stocks vary wildly around the market average, so do indivual properties.

(let me tell you the story of my FIL's rental property after the early 1980's oil bust- in short, thank god he built it all himself, otherwise the bank would have had it all)

What little I've been able to read on broad real estate returns suggests a long term real return somewhere between stocks and bonds. But that average wasn't really available before REIT mutual funds.

 

[greg]

Individual properties are the real estate version of individual stocks. Just as individual stocks vary wildly around the market average, so do indivual properties.

(let me tell you the story of my FIL's rental property after the early 1980's oil bust- in short, thank god he built it all himself, otherwise the bank would have had it all)

What little I've been able to read on broad real estate returns suggests a long term real return somewhere between stocks and bonds. But that average wasn't really available before REIT mutual funds.

And just like stocks and mutual funds over the longer term, the expense ratio/percentage of ownership can be the most important factor in good-bad outcomes. When new RE buyers start out, they often do a poor job estimating initial expenses, e.g. "That new roof will cost what?" Over time, your skills improve, or you just quit the RE investment game. The first property is always the toughest one where the greatest amount of learning takes place.

And if you like REITs as an asset class and want to invest a significant amount, it's probably worthwhile to learn as much as possible about management and what's going on behind the 'offered by the seller' numbers.

 

[tryan]

... and for many - I am afraid - there will only be one RE purchase.

Check this link:

http://www.eagletribune.com/siteSearch/apstorysection/local_story_316064704

What were these people (realtors, mortgage originator, lenders, lawyers, and buyer) thinking?!? $9/hr at a laundry mat and she gets a $300k mortgage!

 

[HFWR]

Pretty accurate description of a bubble, IMHO...

 

[wabmester]

... a co-op i bought in 1987 as an investment was 73,500 , fell to 54,000 after the dip and today 150,000

... as you see these are actual geographical returns on property we own or owned and even they vary greatly in a hot city like new york city depending on what and where the real estate is.

Yes, I see.

So, did you rent out the co-op? If, for example, you were able to net $500/mo from your co-op in 1987, you were getting a yield of 8%. And you were probably able to increase that with inflation over the years. 8% rent + 4% capital appreciation = 12% annual returns. And you're complaining about low returns for this one?

On the other hand, if you had invested that money in a broad index of Japanese stocks in 1987, your returns would have been roughly zero. It's relatively easy to lose money in the stock market compared to real estate, IMO.

 

[mathjak107]

yes we did rent it and overall it was a break even for most of the years up until recently when we cleared about 150 a month