There are many good posts on real estate board, but there are as many flawed posts as well. The flaws come in many forms: like comparing the absolute return between stock and housing price, like using inflation-filtered chart (like that from Schiller) to show a misleadingly presented long period of price stagnation (from 1950 to 1970). All the flaws seem to originate from people’s misunderstandings or lack of understandings on two factors:

1) Inflation.

If you put inflation back in Schiller’s chart, you will not see a flat pattern any time period, housing price simply kept rising and rising, with no end in sight for over 116 years. Why inflation is the dominating factor to consider when making real estate investment? Because it is inflaiton that created wealth for investors after leverage. Investors borrowed lost-cost (low rate) loan from banks to lock down 1950’s buying power to exchange for 1970’s inflated buying power. The loan term is fixed, the cash flow is fixed but the buying power is inflated from 1950 to 1970, probably triple or quadraple after 20 years. That’s where the wealth came from. Not from absolute value increase for any particular property over 20 years, but from the change in buying power.

2) Leverage

Stock investors like to compare absolute return between RE and stock, and always conclude that stock is better over long term because even after factoring inflation, stock returns more than RE. But one key element they either don’t understand or don’t remember is the ability to leverage in RE investment. The ability to leverage in RE is probably one and only one we love real estate, it simply means that as investor, he or she has no need to put down his hard earned money, but can make nearly 90% leveraged investment. That means he used the lever of 90% of bank’s money to lock down yesterday’s buying power to exchange for future’s inflated buying power. If one strives for near 100% financing, then the return percentage may approach to infinity. Of course, that’s pure math. But in real life, if one can approach 80% leveraged financing, the return is already far greater than he could get from any non-leveraged investment, over the long term.