Over the past ten years, Americans have started to favor real estate over other avenues of investing. A recent survey conducted by Gallup found that 41% of Americans think real estate is the best long-term investment. Real estate's ability to generate passive income, provide a tax shelter, build equity, and offer diversification is finally being appreciated by the masses. Yet despite the majority of Americans favoring this asset class, it can still be an intimidating one to start investing in.
Image source: Getty Images.
If you've been putting off real estate investing, these four charts will show you why 2022 is the year to start investing.
Outpacing inflation and outperforming the stock market
Image source: Case-Shiller Home Price Index 20 City Home Composite.
Real estate is an incredible hedge against inflation. As the cost for goods and services increases, so does real estate, often far faster than the rate of inflation. According to the Case-Shiller Home Price Index for the top 20 cities in the United States, home prices have grown over 17% year to date. If you compare that to today's inflation rate of 7.5% and the S&P 500 year-to-date return of -8.5%, it's obvious why real estate is a good investment right now.
The shortage will take years to rectify
Image source: Whitehouse.gov.
Today's incredible real estate growth isn't an anomaly, it's due to a national housing shortage. According to a report by the White House using data from the Federal Reserve, housing production has fallen behind population growth for the past 10 years. This has resulted in a notable deficiency in supply despite demand remaining steady. While homebuilders are working at wit's end to increase supply, it will take years to truly fill the gap. This means despite potential turbulent times in the markets, real estate demand, and likely, price growth, will hold steady in 2022, if not beyond.
Historically strong performance
While there is clear opportunity and reason to believe 2022 will be another tremendous year for real estate, there's a lot to be said about its historical performance. Real estate investment trusts (REITs), which are a special type of stock that invests in real estate or real estate securities, have consistently outperformed the S&P 500 on a rolling 20-year period.
Image source: NAREIT.
According to the National Association of Real Estate Investment Trusts (NAREIT), 56% of the time, REITs outperformed the S&P 500 on an annual basis. Given the ease and access for investors to purchase shares in REITs, they remain one of the best ways to start investing in real estate today.
Image source: iproperty management.
Not all real estate investment trusts (REITs) hold the same opportunities. Certain asset classes, such as hotel and office space, provided a negative return in 2021. And these industries will likely have another rough year. Since real estate is driven by supply and demand, it's imperative that investors understand what is driving demand in each industry before investing.
Multifamily housing is booming as demand for rental real estate grows at an even faster rate than home prices. Industrial real estate is another industry that is experiencing robust growth fueled by the rise of e-commerce and the need for manufacturing solutions closer to home. However, even when factoring in all subsectors within the equity REIT umbrella, a $1,000 investment in 1993 would be worth $28,732 thirty years later. That's roughly 33% more than a $1,000 investment in the S&P 500 would be worth during that same time period.
The choice is yours
The good news is that there are a ton of options for investing in real estate in 2022. REITs are likely the easiest and fastest way to diversify your portfolio into this high-demand and rapidly growing industry, but they aren't the only way. There are a lot of benefits to owning and managing a real estate investment, such as a rental property, yourself. If you have enough time and capital to commit to this method of investing, the payoffs can be very rewarding. No matter how you invest, the key is to start investing now. Ten years down the road, you'll look back and wish you had started sooner.
