Is Real Estate Still a Good Investment?

Cottage in the mountains

Is real estate still a good investment. The last decade has seen a drastic change in the nation (and world) real estate market. It’s been scary and tumultuous at best.

Cottage in the mountains

6.4% is the average annual increase in home prices from 1968 to 2004, but by 2006 there was only a 1% annual increase, at which point it declined 30% from 2006 to 2010.

According to the S&P housing index which shows data from 20 major cities, 2010 saw a rise back to about 4% annual growth, then dropped again in early 2011 and struggled with losses for a couple years. In late 2012 the market started gaining again, up 13.6% for 2013.

S&P/CASE-SHILLER U.S. NATIONAL HOME PRICE INDEX
S&P/CASE-SHILLER U.S. NATIONAL HOME PRICE INDEX

This is not to say the housing market will continue on this upward trend, nor does it say that real estate is a bad investment. It simply says it changes.

If we take the average over the past 27 years according to the chart above, we are looking at about a 260% increase in home value. Though this isn’t exactly how home values are determined, it still gives one a good idea of investment potential of real estate. It’s OK.

The road to riches is not fast. And if you’re like me, it’s not just about the investment potential, it’s about being happy, not worrying so much about short term downs in the market, or even huge losses in short periods of time.

Looking at it this way Real Estate is a mediocre market. And here’s why.

If you had $100,000 to invest in an S&P index fund in 1987, and it would have technically grown 710.79% if you could leave it be and not touch it, that $100k initial investment would be worth about $710,790.00 today.

S&P 500
S&P 500

 

However, if you had invested that same $100k into real estate in 1987, your real estate would only be worth $260k today. Is a 710% return on your investment better than a 260% return? Sure. Is real estate a bad investment? No.

Is real estate still a good investment. Of course it is! This is not about investing, it’s about what you get for your money. If you were looking at this from a strictly monetary point of view, then yes, investing in an index fund which simple diversifies your investment capital into many stocks and spread out your risk with the knowledge and “best guess” that the market will most likely rise over time. As long as you leave the money alone and let it work for you, it will return great dividends and capital gains.

Barn on a farm

However when you’re talking about real estate in terms of intrinsic value, and what you gain from it as a family, the value is incalculable. If you bought a house in 1987 and lived in it for 27 years, and decided it was time to sell it and move into something smaller (now that your kids are raised and out of the house), you’d be sitting on a hefty little nest egg. Not only that, you got 27 years worth of use out of your home.

Off Grid Farm

Your kids had a place to live and grow, a roof over their heads, and you now can reap the rewards of a life well spent and a wise investment decision.

It’s not just about the money, it’s about the intrinsic value you get from it over time.

So yes, overall, real estate is a great investment.