A tale of two markets, two contrasting results

By John Cunniff The Associated Press
Thursday July 26, 2001

Among investments, there is probably no greater performance contrast over the past year than that between housing and stocks. 

It isn’t solely that the first is up and the second is down. 

The housing market has been a model of stability, with existing home prices rising relentlessly through the year for a net gain through June of 8.8 percent — impressive to be sure, though it’s only part of the story. 

The rest of the story multiplies that 8.8 percent. Assuming the house was purchased for $120,000, with $20,000 down, and rose 8.8 percent, its market value would now be more than $130,500. 

The gain from your original investment would be nearly 53 percent, less the cost of mortgage, tax and insurance payments. You could also buy stocks with only a down payment, i.e. on margin, but your down payment would probably be at least 50 percent rather than 16 percent or 17 percent. And your interest rate would be a lot higher. 

That’s for starters. The stock market, measured by the Dow Jones industrial average, fell 4.3 percent between July 24, 2000 and July 24, 2001. 

Though hard to measure in dollars and cents, the stock market also took a toll on nerves. Rather than a clean line slanting in one direction, as in housing, it traced a nerve-racking, saw-toothed pattern. 

In housing, you don’t have to put up more money if the market price falls, like you might if you face a margin call.  

And you get tax benefits along the way – income tax deductions for the interest and taxes you pay. 

You might get tax deductions in stocks too, but they’re not nearly as generous.  

If you sell at a loss, you might be able to deduct the loss from gains. But note, you have to have gains to benefit that way. And you might be able to deduct margin interest costs, but again, if you have gains. Meanwhile, as a homeowner you stay in the home and enjoy tax benefits whether the price rises or falls. Generally speaking, if you chose your neighborhood well and otherwise bought wisely, you investment will grow. 

The ultimate advantage, as every homeowner is well aware, is that the investment in housing puts a roof over one’s head, a benefit that is not in the slightest enjoyed when owning stocks. At least in the past year. 

True, a wise investment in the stock market rises over time – if you’re especially lucky or prescient it might rise at a far greater rate than in housing – and perhaps afford you a bigger roof on a better house. 

But again, the taxman expects to be paid. If stock investors sell at a profit they enjoy a relatively low capital gains tax rate. A homeowner couple pays such taxes too, but often only if profits exceed $500,000. 

That said, it’s an unfair comparison to pick a very good year in home appreciation with a very poor year in stocks. Over the past six decades, annual stock market returns have averaged in the low double digits. 

While that record demonstrates that it’s wise to own securities if you can afford them, are knowledgeable, and have the guts to survive terribly tense times, they are a test millions of people don’t want to take.  

For them, just owning a house is a very wise investment and, to boot, offers a wonderful sense of security, the like of which cannot be matched by the stock market. 


John Cunniff is a business analyst for The Associated Press