Investment House?

By Renae Merle
Washington Post Staff Writer
Sunday, April 27, 2008

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 the District, 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 townhouse in Alexandria. "We decided to look at it less as an investment in monetary terms, and more as an investment in social and family terms," said Gerbsman. "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 townhouse. "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," said Gerbsman.

The housing slump has home buyers 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.

A home bought in 1978 appreciated an average 5.3 percent a year through 2007, while the Standard and Poor's 500-stock index delivered a 9.9 percent return during the same period, according to figures from the National Association of Realtors.

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," said Winans. "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 E. 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," said Linfield.

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