Investors in 2000 deciding where to place money would have done much better buying into an index representing U.S. home prices than stocks in the country’s largest public companies.
“A lot of people have been looking at real estate as an alternative investment to stocks,” said Ingo Winzer, executive vice president of research at First Research in Raleigh, N.C.
But those investors would have faced a different outcome if forced to choose between buying Colorado homes and Colorado stocks.
Nationally, prices of existing homes have rocketed by an average of 10.7 percent annually since 2000, and Colorado homes have appreciated 6.1 percent, according to an index of prices paid for existing homes from the Office for Federal Housing Enterprise Oversight.
Those gains contrast, over the same period, with a 4.1 percent average annual loss for the Standard & Poor’s 500, a basket of the largest U.S. companies. Colorado stocks averaged returns of 3.4 percent a year.
Over the past three years, real estate continued to outperform stocks – except in Colorado. Thanks to a heavy weighting in energy-related companies, Colorado stocks soared 17.9 percent a year, while Colorado homes rose 4.3 percent annually.
Slower job and population growth over the past five years has depressed home demand while continued new construction has lifted supply, Winzer said.
Phil Storms, a certified financial planner with Westmont Cos., a Denver investment firm specializing in real estate, sees the low appreciation rates in Colorado home prices as evidence of a market that got too hot in the 1990s and remains too rich.
“We haven’t made any real-estate investments in three years,” Storms said.
But Tim Jares, an associate professor of finance at the University of Northern Colorado, has a different view.
The lack of robust home appreciation will cushion the Colorado market should home prices nationally tumble after their strong run, he said.
Nationally, home appreciation will moderate to the 4 percent to 5 percent range in 2006 and 2007, the Mortgage Bankers Association forecasts. That’s a rate that matches the pace seen in Colorado – and one the trade group describes as sustainable.
There are, of course, fundamental differences between investing in stocks and real estate.
Real estate is a less efficient market, allowing buyers to find bargains and, with some effort, reap a higher reward. By contrast, an investor in Microsoft or another large corporation is along for the ride.
But real estate is much less liquid. Sales can take months to complete, and they carry high commissions. And the use of borrowed funds or leverage is much greater, which generates higher returns in a rising market but can wipe out an investment should prices fall.
While it makes sense for social and financial reasons for people to own their homes, they need to spread their investments across stocks, bonds and other asset classes.
“Absolutely, it makes sense to diversify,” Jares said.
Stocks have historically outperformed real estate as an investment, Jares said. But real-estate prices have historically suffered less volatility than stocks.
Staff writer Aldo Svaldi can be reached at 303-820-1410 or asvaldi@denverpost.com.
