The Lost (And Found) Decade

With the stock market and real estate market both reeling from the recent turmoil in the lending markets, prudent investors are doubly confused about where to park their money these days in order to safely maximize its long-term appreciation. Last week the Wall Street Journal complicated matters considerably by running an eye-opening front-page article that pulled the rug out from under the widely-held notion that blue chip stocks are generally the best investment when held for ten years or more. Entitled “Stocks Tarnished by ‘Lost Decade’” the article suggests that money invested in the stock market ten years ago is worth only marginally more today than it was back then, especially when adjusted for inflation.

Authored by E.S. Browning, the article led off with statistics that were no doubt unsettling to long-term devotees of the stock market. It read: “The Standard & Poors 500-Stock Index, the basis for about half of the $1 trillion invested in U.S. index funds, finished at 1352.99 on Tuesday—below the 1362.80 it hit in April 1999. When dividends and inflation are factored into returns, the S&P 500 has risen just 1.3% each year over the past 10 years, well below the historical norm, according to Morningstar Inc. In light of the current wobbly market, some economists and market analysts worry that the era of disappointing returns may not be over.”

Conventional wisdom in the stock market suggests that when investors purchase a broad variety of stocks and hold on to them, they generally fare better profit-wise than they would with other investments. Unfortunately, that rule hasn’t held true for stocks purchased in the late 1990s or 2000.

“Over the past nine years,” according to Browning, “the S&P 500 is the worst-performing of nine different investment vehicles tracked by Morningstar—including commodities, real estate investment trusts, gold and foreign stocks.” Big U.S. stocks were even outdistanced by lowly Treasury bonds, whose performance is typically much weaker. His overall conclusion: “Through history, lengthy stock booms have typically been followed by busts that can last a decade or more. Some economists believe that current economic troubles are severe enough that the period of stock weakness isn’t over.”

Here’s another eye-opener. In spite of all the bad things you’ve read or heard in the media about Sarasota real estate, the median home price ten years ago—in February 1998—was $112,500. Today, that price is $254,200, according to the February sales statistics released just two weeks ago by the Florida Association of Realtors. The median price represents the midpoint in the market; half the homes sold for more, half for less. This 226% median price jump between February 1998 and February 2008 includes the sizeable downward correction in the median price from its highest perch amid the wildly unsustainable real estate boom of 2004/2005/2006. Further, as Sarasota began its real estate correction sooner than most other Florida markets, statewide statistics now strongly suggest that it is emerging from it faster as well.

Unlike seeing the Standard & Poors 500-Stock Index remain disappointingly flat over the past ten years, if you’ve owned a Sarasota home for an equivalent amount of time you are looking at a substantial return on your decade-long housing investment. Even if you’ve only owned the home for five years it has appreciated to the tune of 147% since February of 2003.

For some stock market investors the past decade was marked by disappointment and lost opportunity. For Sarasota homeowners it was a decade of healthy appreciation, even factoring in the correction that has unfolded over the past couple of years. Alas, nothing is more reassuring than a comfortable nest egg, except perhaps the immeasurable pleasure of living in it.

  • User Gravatar Bob Yohn
    April 6th, 2008

    As an investor for over 40 years and a mortgage broker and commercial lender for over 15 years, I would like to offer a perspective on your article. Stocks obviously have not been a great investment over the last 9 years, yielding only 1.3% after adjusting for inflation and dividends. However, in comparing the price appreciation of homes, you used an extra year(10 years instead of 9) and did not adjust for inflation. An increase from $112,500 to $254,200 is a 126% increase not a 226%increase. Also, adjusting for inflation, your house price in 1998 becomes $146,000, not $112,500. This gives an appreciation of 74% over 10 years, or about 6% a year. Good, but not quite as good as stocks have averaged over the past century. The past ten years have been the worst for stocks since the 1970’s and before that the 1930’s and the past 10 years have been the best decade for housing ever.

  • User Gravatar ToddinFL
    April 7th, 2008

    Bob Yohn said:

    “The past ten years have been the worst for stocks since the 1970’s and before that the 1930’s and the past 10 years have been the best decade for housing ever.”

    C’mon Bob ! This is a RE blog and we have to move inventory and generate sales. Why do you have to come along and give a reasonabl, historical perspective of investments when what we’re focusing on is selling RE in an ever declining market ? 🙂

  • User Gravatar Matt Gentile
    April 10th, 2008

    It’s nice to see that even my good friends at MS get pounded by the PB Posts’ main RE reporter.


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