Gallup has released a recent poll showing most Americans believe real estate is the best long-term investment.
The poll itself is a bit of a mess. When considered closely, it has a few conceptual problems which undermine its results — throwing a handful of spaghetti at the wall might have produced similar results. However, with that said, Gallup is still Gallup, and we ought to give them the attention they deserve.
Here’s a condensed rundown of the results:
- lower-income Americans (households earning $30,000 or less annually) are the most likely to choose gold as the best long-term investment;
- young Americans (18 – 29) are evenly split, with one quarter each saying real estate, stocks, gold and savings accounts are the best investments; and
- 38% of those surveyed earning $75,000 or more annually were the most likely to choose real estate as the best long-term investment.
Overall, between all income and age groups, real estate captured the most votes for the best long-term investment, snatching an average 30% of the vote. Gold came in a close second.
Before we can draw any conclusions from these data, it’s really necessary to critique the poll itself. Asking the average American what “the best investment” is can take on vastly different meanings depending on the person being asked and their investment goals. For some who see risk as critical to any investment, investing might mean betting on a long-shot in the hopes of a windfall. For others, the concept is much more conservative, meaning a hedge against inflation and a safe piggy bank for a rainy day, education or even retirement. Still others might expect double-digit gains (10% per annum or more) eventually replacing the income they collect as a result of their labor.
The qualifier “long-term” really makes all the difference in the world.
Once considered rationally, those who said real estate is the best long-term investment might not be too far off base. Historical data collected and analyzed by first tuesday shows that California real estate, on average, appreciates at about 2% to 3% per year, consistent with the target rate of inflation. Thus, if held for the long-term (at least 10 years) one can expect their real estate investment to function as a hedge against the corrosive effects of inflation. It could possibly even produce a modest return above the trendline (much more than any traditional savings account would ever produce, any way).
With that said, real estate is Volatile with a capital V.
Thus, any real estate investor (or traditional buyer with investment goals in mind) must be willing to go the long haul with their funds tied up in an illiquid asset; otherwise the downside risks can be substantial (remember 2008?). Now for those whose definition of a successful long-term investment is one that produces double-digit returns, real estate is likely not your best bet. Even with the volatilities associated with the stock market, it has been shown time and again that building a medium-risk portfolio and holding it for 10 years or more will produce far greater net returns than buying a single family residence (SFR). This is especially true once the costs of homeownership, including taxes, continual property maintenance and the servicing of mortgage debt are taken into account.
Strictly speaking for the average retail investor, real estate is shelter with the added benefit of an inflation hedge, not an “investment” providing lofty returns in the traditional sense of the word. And you don’t have to just take our word for it — Nobel laureate Robert Shiller consistently argues the same.
It is no coincidence, by the way, that those who believe gold to be the best long-term investment and are most entranced by its sparkle are also those in the lowest income bracket. It is typically sold to individuals with little experience as an investor under the myth that gold is a durable, risk-free asset. On the contrary, investing in gold is like shooting craps — the pure definition of a gamble.