• Americans prefer real estate to any other investment, a new survey shows—with millennials liking it most. 
  • But housing is a so-so way of making money. It's hard to sell quickly and often needs upkeep that can cost thousands of dollars a year.
  • Unlike many other assets, the very process of buying and selling a house also costs thousands of dollars, which can eat away any increase in the purchase price.
  • "We have many more clients that have broken even or lost money in real estate than have made a killing in it," said one financial planner.

While fewer Americans are buying homes these days, more of us than ever believe we should be. The portion of people who say real estate is the ultimate investment -- better than stocks, bonds or gold -- has hit a new high.

 

Nearly one-third of Americans believe real estate is a better way to invest money for the long term, according to a Bankrate.com survey released this week. Younger people are more likely to say so, with 37% of 23-to-28-year-olds ranking real estate above stocks, bonds, gold and savings accounts as an investment. This is the strongest sentiment for real estate in the seven years Bankrate has run the survey, said Greg McBride, the website's chief financial analyst.

Sadly, real estate is no better an investment today than it was in the previous century—and that's to say, mediocre at best. For people with a bit of money to put away, the stock market will almost always give the best return.

Between 2006, the peak of the previous housing bubble, and 2019, average home prices have increased just 13%, according to the S&P/Case-Shiller Home Price Index. In that same time period, the S&P 500 rose 125%. In other words, stocks did 10 times better than real estate.

Despite the stock market's better returns, "it remains rather unloved," said Bankrate's McBride. "We've been doing this survey for seven years and we've been in a bull market for the entire seven years, but investors haven't really warmed to it." Just 1 in 5 think the stock market is the best long-term investment.

Things you can touch

A house is a much more unwieldy investment than a stock portfolio. It costs money to buy and sell and maintain a property, and it can lose value over time, like an iPhone or a car. If housing is an investment, buying a house is akin to purchasing a single share of stock—except instead of paying a quarterly dividend, the investment needs you to put some money into it periodically to keep it in good shape.

Nevertheless, familiarity breeds contentment when it comes to real estate. While less than half of Americans own any stocks, nearly two-thirds own the home they live in. Many if not most Americans are at least aware of homeownership through family, friends or neighbors. And of course a house is a physical asset in a way that financial instruments are not. "You can kick it, touch it, look at it; you know it is there. It provides a sense of comfort that is missing when we hold stocks and bonds," said Anders Skagerberg, a financial adviser at Skag Financial in Murray, Utah.

The way most people think about home sales also leaves out many costs, artificially inflating real estate's perceived rate of return, said Tyler Reeves, founder of Plimsoll Financial Planning in Birmingham, Alabama.

"You find out that this house was bought for $300,000 and sold five years later for $400,000 -- wow, that's a quick $100,000!" he said. "What they don't see is during that five-year period, they had to get a new HVAC unit, and a hot water heater, and pay a mortgage for five years."

Repairs and maintenance are an often-overlooked aspects of homeownership, especially for younger homeowners. Upkeep alone—tasks like yard work, carpet cleaning and maintaining the gutters—can run $3,000 a year, according to a recent Zillow study. 

Unexpected repairs can cost much, much more. One young Tennessee homeowner spent $21,000 over six months to repair her modest 1950s ranch house, she wrote in Business Insider. While she admitted that "procrastination made some of the problems worse," many of the repairs were the inevitable result of normal wear-and-tear: replacing the roof, fixing cracked ceilings and upgrading some electrical systems.

Even in a best-case scenario with minimal upkeep, property almost always comes with carrying costs: the mortgage, taxes, homeowners' insurance, fees for water and services like trash pickup and even a homeowners' or condo association. Those taxes and fees are why first-time homebuyers are often told to budget 30% on top of their monthly mortgage payment to get the "true" cost of owning their house.

Today, a would-be house flipper could buy the $300,000 house in Reeves' example for a $70,000 outlay (down payment plus closing costs) and a monthly payment of $1,130, assuming she has excellent credit. After five years, the lucky debtor will have paid $45,000 in interest payments alone, and—under the 30% rule—about $20,000 in taxes and other costs. If she sells the house for $400,000, after accounting for the agents' fees and the interest, taxes and maintenance she's paid out along the way, she would have made a profit of $22,000.

In that best-case scenario, the flipper got an impressive 31% return on her initial investment. But if instead she'd­­ put $70,000 into a stock-market index fund five years ago, she would today have $34,000 in profit—and arguably for a lot less work.

"We have many more clients that have broken even or lost money in real estate than have made a killing in it," Adam Van Wie, a financial planner in Jacksonville, Florida, told CBS MoneyWatch. "We more often than not try to talk them out of it, but many of them never listen."

Like stock-picking made hard

Still, the ongoing housing crunch makes it unlikely the draw of making a quick profit in housing will ever fade. If anything, financial planners report an increase in the amount of people coming to them with dreams of real estate riches.

"In the last couple years, it's come up in conversation with almost half of my clients," said Reeves. "Seven, eight years, ago you wouldn't have expected it."

Reeves, like most financial planners, emphasized he wouldn't discourage real estate investing for the right person. But it's much more like a job than most people assume, and doing it profitably requires treating it like one.

 

"I know people who make money buying and selling and renting real estate, just like I make money buying and selling stocks and bonds," said Tara Unverzagt, founder of South Bay Financial Planning in Torrance, California. "But that's their life. They spend a lot of time learning the cycle and when to 'buy low and sell high.' "

She added that in real estate, just like in stocks, "the average person tends to buy high and sell low and lose their shirt."