As a follow-up to our recent post on Wall Street’s wild ride, we wanted to give some thought to what real estate looked like as an investment.  Over the last few years we have heard many clients express doubts about whether owning a home was, in fact, a smart “business” decision.

When compared to the stock market, the answer is pretty self-evident.

In many ways the volatility that unsettled real estate markets over the past few years has largely subsided, leaving housing prices at their lowest level since the turn of the century.  In Maine we are in fact beginning to see some small increases.  In a clear case of over-correction, seasoned market watchers are now calling some part of the country  undervalued.

Focus on the Long Term

Real estate is rarely a practical way to earn a short-term profit, as many underleveraged property flippers discovered the hard way once the boom went belly-up.  Still, as a means to enjoy steady long-term appreciation, it remains one of the most reliable.

Each month, real estate authority Steve Harney updates a graph comparing returns on investment for real estate versus the Dow, S&P and the NASDAQ.  Recent volatility in all these markets notwithstanding, had you invested $100 in each in early 2001, by now you would have netted $140 in real estate, versus $110 on the Dow, $92 on the S&P and $70 on NASDAQ.  (Source:  MSN, Case Shiller—updated 8/1/2011)

Investor vs Homeowner

Realistic real estate buyers should have an eye to the future – whether you are an investor or buying a home strictly for you own use.  Home prices, which are presumed to be at or near their bottom, are expected to trend higher over the next several years, restoring real estate to the reliable, long-term proposition it has usually been.  Add this to historically low interest rates and the cost of owning a home has seldom been lower.