I almost let an article about how great luxury real estate has performed sneak by without comment until I saw a dubious comparison to the stock market. Here’s what caught my eye:
Adjusted for inflation, that’s a compound annual growth rate of 8.7%. The S&P 500 stock-market index averaged an inflation-adjusted annualized return of just 4.1%.
This makes for a good teachable moment about how to analyze investments, in much the same way as the presidential election or March Madness or the saving habits of a janitor. I say this while reminding you that I am not a housing basher, unlike some. I have been positive on residential real estate for a long while.
Let’s dive right in:
Don’t use outliers to prove your point: Yes, the estate of newspaper magnate William Randolph Hearst is a formidable and impressive home. But it hardly makes for a good sample to use when describing the advantages of real estate in general, or even luxury real estate in particular. Just how many 50,000-square-foot, five-acre properties in one of the most-expensive zip codes in America are there? Like Picassos and rare Ferraris, it is a one-off, not representative of residential real estate as an asset class.
Use actual transactions, not aspirational pricing: Owners of illiquid assets have to come up with credible ways to price their holdings. Wishful thinking doesn’t count. The market hasn’t improved enough to justify lofty asking prices for seller who hope to flip a property. Homes that don’t sell experience price declines, not increases.
Include all costs and fees: As an investor, I have spent the past few decades watching my costs go down. As a homeowner, I have spent the past few decades watching my costs go up.