Wall St. vs. Front St. Stocks outpace real estate in tight race

The erratic U.S. stock market seems to be beating out a soft northern Michigan real estate market as a long-term investment option.

But investors can be forgiven if they have a tough time figuring that out, with the stock market darting around like a jitterbug and local real estate needing a shot or two of caffeine.

Still, given the fivefold increases in both stocks and some northern Michigan properties since 1990, it's clear both real estate and the equity markets can be excellent investments, even when adjusted for inflation.

Based on recent sales figures, a $40,000 purchase of 40 acres in central Leelanau County in 1989 could bring more than $240,000 to $250,000 today. And a similar investment in the stock market that same year would have yielded $257,000, according to the Vanguard 500 index.

John Martin, owner of The Martin Company in Glen Arbor, recently gave real estate some ammunition with a study of a beachfront lot on Sleeping Bear Bay. Bought in 1980, it would be worth about $1.5 million today-an appreciation of more than 2,000 percent.

Not to be outdone, the stock market would have yielded an appreciation of more than 2,500 percent, said Christopher Lamb, a principal at Old Mission Investment Co. Those figures were based on the Vanguard 500 index, which tracks stocks of companies that have large amounts of traded securities.

That $69,000 would have reached a market value of $167,000 in five years, $305,000 in 10 years, $652,000 in 15 years, and its maximum level, $1,510,000 in 20 years. After the dot-com bust, the value would have declined to about $1,034,000.

But then it would have risen to $1,780,000 in the strengthening market that has prevailed since 2003.

Stock brokers generally consider the real estate-vs-stocks debate to be settled, and not just because it's hard to beat the performance of a good portfolio.

"As cliché as it might sound, you do not want all your eggs in one basket," said Jason Piedmonte, a financial advisor with Smith Barney in Traverse City.

"Diversification among different asset classes is the key to managing risk. And while real estate could be part of an overall investment portfolio, most of us have plenty of exposure to that asset class, namely in our homes."

But real estate brokers aren't ready to cede much ground to their counterparts in the equity business. First of all, there are many individual stock investors who just can't seem to match the performance of the major indexes such as Vanguard and the S&P 500.

Second, real estate in northern Michigan has historically been a strong performer. Its boom continued unabated through the 1990s and into the new millennium, even picking up some momentum after the stock market lost its steam about seven years ago. Some properties have had a 100-percent appreciation over a 10-year period, said Mark Fisher, a broker with Coldwell Banker Schmidt in Glen Arbor.

"The thing about property is that it hasn't tanked like the stock market did," he said.

Indeed, the current soft market for real estate has barely tarnished its attraction, said Roberta Rupp, a broker and co-owner of Rupp & Keen. "Real estate is still a good investment," she said. "The people who are doing well are those who have some cash flow and can pick up some of these good values."

Historically, the investment gains haven't been restricted to waterfront properties. In Leelanau's interior, "we have seen $10,000-an-acre prices where we have view parcels, and we have some stuff right now we would have a hard time selling for $5,500," Martin said. But back in 1990, it might have sold for just $2,000 an acre.

Whether investing in stocks or real estate, buyers have to take a hard look at factors that cut into an investment's appreciation over time. For example, real estate buyers should subtract the property taxes they have paid over the years so they can accurately gauge their property's performance.

Inflation has much the same affect. That $40,000 investment in farmland in 1989 was a bit more money than $40,000 is today-the equivalent of about $67,000, to be exact. So the return some 18 years later is just a little less than one might have thought.

"You have to look at the value of the dollar over a particular period of time," Martin said.

The same thing goes for stocks, although statistics suggest that the stock market has little difficulty outpacing inflation. According to Smith Barney, the S&P 500 averaged an annual return nearly eight points above the inflation rate over the last five years, and 4.5 points above inflation over the last 10 years.

But investors still have to be prepared for ups and downs in the short-term. "Historically, you will find periods when the market performed absolutely horribly over a three-year period, but that's an anomaly," Lamb said. Back in 2001 and 2002, for example, the Vanguard 500 index lost about 30 percent of its value, but gained it back the next year.

However, it's much easier to find a three-year period that showed strong growth, such as 60 percent appreciation during the 1990s or about 35 to 40 percent during the current decade.

The stock market remains as volatile than ever on a day-to-day basis, and that exacts a toll on investors' psychology, too. Major institutional investors are getting new information at lightning speeds and enjoy acting on it quickly, often shooting from the hip."

"You have a number of big institutional investors who make decisions based on large amounts of information, and it comes quickly, so they act fast and ask questions later," Lamb said.

Still, many of those effects are small compared to the overall market trading and shouldn't overly concern investors. BN