Crystal balls notwithstanding, how can we determine if Real Estate is an in a bubble or a bargain? Theories abound.

1) Owning vs. Renting

Comparing the mortgage payment to the equivalent properties rent is a great way to find equilibrium in a market. For instance, use $1,500 rent plus Taxes, HOA & Insurance for a total payment of $1,800 per month (using typical 20% down financing). If rent for the home purchased would rent for $1,900/month, then favorability for owning a home is $100.00 below equilibrium. But, if that home rents for $1,700, then favorability for owning a home is $100 under equilibrium. This theory doesn’t factor the repairs to the home which can be mitigated with a home inspection, home warranty, etc. But on the other hand, it doesn’t factor the tax benefits, hedge against raised rents, and the possibility of moving expenses.

2) Real Estate vs. Stocks

Some analysts use the return on investment (ROI) for Real Estate when compared to Stocks and Bonds to define a bubble or bargain for Real Estate prices. While this may be applicable to some individuals with higher net worth, the average family is simply deciding whether owning a primary residence is better than renting a home. But, using this comparison, the key to beating the stock market as a RE Investor is leverage. Stocks are typically purchased without leverage and RE is typically leveraged. This difference, in the long run, makes it an unfair comparison. But that being said, Real Estate has historically won by more than double the return (1971-2017). Another key advantage to Real Estate investing is tax benefits through depreciation and 1031 exchanging. See graph below Stocks vs. NAREIT. [The FTSE Nareit US Real Estate Index Series is a comprehensive family of REIT-focused indexes that span the commercial real estate industry, providing market participants with a range of tools to benchmark and analyze exposure to real estate across the US economy at both a broad industry-wide level and on a sector-by-sector basis.] Of course, disadvantages to investments in Real Estate abound when compared with Stocks, particularly in the area of liquidity, maintenance costs, and liability.

Other considerations abound when considering bubble vs. bargain. Tax benefits from owning an inexpensive home may not apply because of higher standard deductions. Consult a tax professional to review whether or not owning a home will save you money on April 15th. Additionally, an individual’s discipline to save and invest outside of their mortgage payment should factor into their decision whether to buy real estate or save in other investment vehicles. But it should be clear that savings or investing of some kind it imperative for everyone. According to the Federal Reserve’s most recent survey (2013-2016), homeowners’ median net worth was 44 times higher at $231,400 compared with non-homeowners’ median net worth of $5,200.