For a very long time I have made the argument on Realty Times and elsewhere that real estate is undervalued as an investment. Each time I mention this idea I get e-mail from folks on Wall Street who disagree. Now they can write to The New York Times.

Around the country real estate results in many communities -- but not all -- have been extremely good in the past year. The National Association of Realtors says that median prices for existing homes reached $183,600 in May -- up 10.3 percent in the past 12 months.

However, from an investment perspective, home values have actually risen at a far greater pace.

Imagine that a home was bought in May 2003 for $166,455. Add 10.3 percent and sure enough the price a year later is $183,600.

But did anyone buy a home for cash in 2003? Some people, sure. But most homes, most of the time are financed. If you bought with 10 percent down ($16,546), your cash investment was up 104 percent.

What about those monthly mortgage payments, taxes and insurance? They're just a form of economic "rent" -- vaguely what you would pay if you didn't own, what you might collect if you rented the property, and an "opportunity cost" you might lose if you bought for cash that could have been used in other ways to produce income.

According to "Charting Real Estate's Biggest Winners" (July 18, 2004), The New York Times asked James W. Hughes, dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers University, to compare stocks and real estate from 1980 through March of this year. To get his results, Dr. Hughes used data from the Dow Jones industrial average and the Office of Federal Housing Enterprise Oversight.

"In 1980, the Dow was at 830," Dr. Hughes said. "In 2004, it has been running between 10,000 and 10,500. Rounded off, that's about a 1,100 percent gain." Home prices in New York State over the same period, by comparison, increased 400 percent, according to the federal data.

"So, on the surface, it looks like you would have done better in the stock market," Dr. Hughes said. "However, that does not take into account the ability to leverage your initial housing investment."

In other words -- keeping the numbers simple -- assume you bought a $100,000 home in 1980. "By 2004, it would have increased to $400,000 in value," Dr. Hughes said. "Thus your gain would have been $300,000."

"However, assuming you only made a 10 percent down payment on the home -- or $10,000 -- that means your initial $10,000 investment grew to $310,000," he said. "That's a gain of about 3,000 percent, which is far better than the stock market. If you had invested the $10,000 in stocks, it would have grown to $110,000 in the same 24-year period."

"So that indicates the effect of leveraging your initial housing investment into a much larger value through borrowing."

There are, of course, other factors to consider in comparing housing leverage and capital gains. "Obviously, you have to pay the mortgage each month over the 24 years," Dr. Hughes said. "However, that is generally not appreciably different from what you would have paid in rent if you hadn't bought the home."

And so, finally, someone agrees with the idea that real estate returns should be valued on the basis of the cash actually invested and not just sale prices, that leverage counts, and that monthly ownership costs are simply a form of economic "rent."

Where I disagree with the good professor concerns the Dow Jones average.

To say that the Dow Jones industrial average rose from 830 in 1980 to 10,000 or so this year would be a far better compassion if we were looking at the same bundle of 30 stocks. However, that's not the case.

DJ Indexes.com provides an excellent history of the oft-quoted average -- including company changes since 1980. For instance, during the period from 1980 through 2004 the Dow replaced a number of companies from the index including such well-known names as Johns Manville, General Foods, Owens Illinois, Inco, Westinghouse, Texaco, Bethlehem Steel, Woolworth, Goodyear, Union Carbide, Sears, AT&T, and International Paper Company.

What these changes suggest is that the difference between real estate and stock investments -- even when leverage and economic rent are included -- is still undervalued. Why? Because the bundle of stocks the Dow once represented has changed -- even though many former Dow components continue as functioning, solid businesses.

In other words, to have a fair comparison between the Dow Jones stock index and real estate, lets look at the stocks that were included in the 1980 version of the index. That the 1980 version of the index differs from the 2004 version is to be expected -- different companies are included each year. Alternatively, a house built in 1980 with three bedrooms and two baths on a given lot is substantially the same.

As to what real estate or stock will do in the future, no one knows. As they say on Wall Street, past performance does not guarantee future results. But then, they also say that on Main Street.

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