Part I - Is the stock market a better long term investment than real estate?

Real estate packed quite a punch from 2001 through 2006 appreciating 12.4% annually. That quite handily beat the S&P 500 which gained 4.3% for the same period. So, even though today, the sector has started to lag can we say that real estate is a better investment than the stock market?

When it comes to performance and the long run, there is no question that stocks beat real estate. A recent study by Yale's Roger Ibbotson compared annual returns from 1978 through 2004 for real estate, stocks, bonds, commodities futures, mortgage securities and REITs.

Housing delivered 8.6% while commercial real estate did better at 9.5%. The S&P however managed 13.4%. Robert Shiller, also at Yale, argues that over time, housing's rate of return trends back to the mean of around 3% annually.


If that is the trend, given the run up, we're faced with many years of losses or at best little appreciation.

Before you jump to the conclusion that real estate is a poor investment, remember that REITs have performed exceptionally well in the last year with returns close to 15%. Then again REITs are traded just as stocks on the various exchanges.