Study: REIT Performance Diverges from Home Prices

A new study done by economist Jack Goodman for the National Association of Real Estate Investment Trusts rebuts the view that owning a house voids the merits of investing in real estate investment trusts.

"The misconception that 'real estate is real estate' has intuitive appeal and probably contributes to investors' decisions," Mr. Goodman says. "But this is one of those situations in which the intuition is simply wrong and could cost investors."

The study, titled "Homeownership and Investment in Real Estate Stocks," compared house appreciation to the quarterly return performance of a number of REITs over a number of years.

"Simple statistics hint at the potential for diversification gains for homeowners who invest in real estate," said Mr. Goodman. "The correlation between house price changes and the total return on REITs has been low over both the most recent 10 years, 1992-2001, and also the full 25 years since 1976 for which comparable data are available. In addition, the risk/return performance of REITs has been competitive with that of other financial assets - including large-cap stocks, small-cap stocks, international stocks, long-term bonds, and short-term Treasury bills - over both of these historical periods."

The 19-page study concluded that REITs "could have improved the performance of investment portfolios of households with midlevel risk preferences, increasing the average return of those portfolios, decreasing their volatility, or both."

A widely-used index of single-family house prices nationwide gained 5.7% annually on average from 1976 to 2001. Equity REITs produced a 6.1% annual average return on a price-only basis, but with dividends reinvested, REITs' average annual total return for the span was 15.2%.

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