Real estate? Stocks? Smart investors have both

WASHINGTON — Jason Gerbsman and his wife, Lauren, began thinking about buying a home just as the housing market began to slump two years ago.

The couple, who were renting an apartment in Washington, D.C., had saved a "substantial" amount for a down payment. But they wondered whether real estate was the best way to invest the money they had saved since college. The question prompted Gerbsman, a financial consultant, to create a series of spreadsheets forecasting how the money would perform in diversified stocks or in other financial vehicles.

The couple struggled with the question for more than six months, concluding that stocks would likely bring a bigger profit over the long term.

"You want to make sure you are getting the best for your money," said Gerbsman, 31.

Still, the Gerbsmans opted to set aside financial considerations to buy a two-bedroom town house.

"We decided to look at it less as an investment in monetary terms, and more as an investment in social and family terms," Gerbsman said. "We're looking at this as a long-term investment, not a flip."

But the couple has hedged their bet. They did not throw all of their money into the town house.

"We were not looking to lock up our entire savings in a piece of property. Then, of course, we were going to be obsessed in the dollars and cents of it," Gerbsman said.

The housing slump has homebuyers wondering whether real estate — traditionally a person's largest investment — is the best way to lock up their money over the long term.

Some are wondering whether the stock market may be a better place to park their cash. Both investment types endure boom-and-bust cycles, soaring during periods of overvaluation, then slumping when they slip out of favor.

Investors fall in and out of love with either real estate or stocks depending on the cycle, financial planners say.

"The stock market was the place to be in '98, '99, especially technology stocks," said Peggy Cabaniss, former chairman of the National Association of Personal Financial Advisors.

"Then you see this huge collapse and people say, 'I am never going to go into stocks again. I am going to go into real estate, where it's safe.' "

Now, with home prices falling and property sometimes taking months to sell, some people are running away from real estate again.

"It was the dot-com bust, now we have the subprime bust," said Ken Winans, president of investment and management research firm Winans International.

Nationally, a home bought in 1978 appreciated 347.4 percent through 2007, while the Standard & Poor's 500-stock index was up 1,437.9 percent during the same period, according to figures compiled by the National Association of Realtors.

Locally, a report by the Northwest Multiple Listing Service that goes back to 1989 shows that the average price of a home in King County rose from $134,567 in 1989 to $497,855 in 2007, an overall increase of 270 percent.

The S&P 500 index rose 314.6 percent from the end of 1989 through 2007, meaning that $134,567 invested in stocks making up that index would have grown to $557,915.

Choices not easy

But some economists see it as an impossible choice: Do you follow the example of real-estate mogul Donald Trump or billionaire stock-market investor Warren Buffett? The answer, they say, is that neither model is right for everyone.

"Warren Buffett owns real estate, and I am sure Donald Trump owns stock," Winans said. "The point is there is no one best investment. The people who are successful in the long term usually diversify into both camps."

Financial planners argue that any investment strategy should include real estate and stocks.

Real estate can be an important ingredient of a homeowner's retirement plan, for example, said Leslie Linfield, founder of the Institute for Financial Literacy.

Once a home is paid off, a retiree can either live there with low living expenses or sell it and downsize, she said.

"A home should be a part of everyone's retirement planning," Linfield said.

For some financial planners, the chief benefit of stock investments is the relative ease and low cost of a transaction. It can cost as little as $10 to unload a stock. By contrast, a homeowner must pay to prepare a property for sale and will likely see real-estate agents take 5 to 6 percent of the sales price in commission.

Chance to diversify

With stocks, investors are also able to diversify, hedging against big losses in one stock with gains in another. Some investors are also comforted knowing they can find out minute by minute how much their holdings are worth.

"With real estate, you don't know what it's worth until you sell it," said Veena Kutler of Garnet Group, a financial planning firm in Bethesda, Md.

Investors in the stock market also benefit from a tax structure that favors them holding their shares for long periods.

The profit from the sale of stock held for more than a year is taxed at 15 percent, while shares sold before then are taxed according to the investors' income bracket.

Stocks are also relatively hassle-free. Shareholders escape the tasks associated with homeownership — cutting the lawn and replacing the roof.

"Real estate involves a lot of sort of onerous responsibilities that you don't get with investing in stocks," Kutler said.

But for a nesting investor, the hassles of homeownership can be attractive. It is an investment you can check on nightly.

"You get to sleep in it, you get to dream in it. Nothing beats that," said Laura Fall, a real-estate broker in Arlington, Va.

Real-estate values traditionally grow more slowly than stocks, offering stability.

That doesn't mean real estate never loses value. Before 1950, housing values declined regularly during times of war and the Great Depression, said Winans. Since then, the value of new homes has fluctuated.

But over the long term, real estate traditionally regains its value, whereas a company can file for bankruptcy or otherwise fail to regain its footing, ruining a stock investment.

Home prices typically rise 1 to 2 percent above inflation, and someone planning to keep his home more than five or 10 years will see its value rise, according to Lawrence Yun, chief economist at the National Association of Realtors.

Homeownership is also a forced savings plan, Yun said. "It exerts discipline on the homeowner. They are paying down their principal before they know it," he said.

Seattle Times desk editor Bill Kossen contributed to this report.