Putting The Real Estate Crash In Perspective
For years, real estate was considered a sound investment by the public. While the recent bubble certainly over-hyped the asset class’s potential, real estate’s investment potential was already widely known. And then came the crash. First, residential real estate prices tanked. Homes that had steadily appreciated for their owners over the years suddenly lost value. And not just a little. Homeowners foolish enough to have taken out interest-only, subprime mortgages faced devastating rate increases, skyrocketing the foreclosure rate and fueling higher unemployment (which in turn led to more foreclosures). And then the commercial real estate market started to go south…
Even now, in the early stages of what I hope is a robust recovery, real estate is an investment few want to own. Sure, there are a few savvy investors who view this as an opportunity to load up on quality properties at bargain prices, but by and large real estate seems to have lost its luster. Just as everybody “knew” real estate was the quickest way to riches just a few years ago, today everybody “knows” real estate is a high-risk investment with more losses to come.
Real Estate’s Long-Term Performance Record
Likewise, everybody “knows” that anybody still exposed to real estate during the crash was wiped out. And yet look at these returns for the Vanguard REIT Index Fund (VGSIX):
| 1-Year | 3-Year | 5-Year | 10-Year | |
| CAGR | 59.04% | -13.44 | 0.59% | 10.54% |
That’s right, over the last decade commercial real estate as represented by publicly-traded REITs has returned just over 10% per year, even including the recent crash. Long-term buy-and-hold investors seem to have done just fine in all this. It is the speculators and short-term traders who lost big. Which camp do you belong to?
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Real estate typically has around a 18.5 year cycle plus or minus a few years. Ten years only captures a little over half of this cycle. I am interested to know what the last 20 year REIT return average is.
The 1975-2005 number is 13.8% per year according to: http://www.investinreits.com/reasons/performance.cfm. I’d have to do some searching to find 20 year numbers.
The returns from 1975 to 1980 would be influenced by the high inflation rate at the time, but I would not be surprised if there were higher than normal real returns in real estate during that time.
REITs are a good way to diversify your investments and reduce overall risk. However almost all of my investment books written before 2000, show historical average REIT returns somewhere between bond returns and stock returns.