For the majority of U.S. history – or at least as far back as reliable information goes – housing prices have increased only slightly more than the level of inflation in the economy. Only during the period between 1990 and 2006, known as the Great Moderation, did housing returns rival those of the stock market. The stock market has consistently produced more booms and busts than the housing market, but it has also had better overall returns as well.
Any results derived from comparing the relative performance of stocks and real estate prices depend on the time period examined. Examining the returns from just the 21st century looks very different than returns that include most or all of the 20th century.
Reliable data on the value of real estate in the U.S. is murky before the 1920s. One inflation-adjusted value index between 1928 and 2012 placed the annual rate of appreciation for real estate prices at just 0.2%. The peak for real estate growth occurred between 2001 and 2005.
The inflation-adjusted appreciation on the Dow Jones Industrial Average (DJIA) over the same 84-year period was 1.6% per year. Compounded over time, that difference resulted in a fivefold greater performance for the stock market.
There aren't many investors with an 84-year investment horizon, though. Take a different time period: the 38 years between 1975 and 2013. A $100 investment in the average home (as tracked by the Home Price Index from the Federal Housing Finance Agency (FHFA)) in 1975 would have grown to about $500 by 2013. A similar $100 investment in the S&P 500 over that time frame would have grown to approximately $1,600.
Apples and Oranges
While stock prices and housing prices both reflect the market value of an asset, one should not compare houses and stocks for market returns only.
Stocks represent an ownership interest in a publicly traded company. They are not tangible, physical assets and serve no utility other than a store of value and a liquid security instrument. While there is some reason to believe that the overall stock market would gain in real (as opposed to nominal) value over time, there is little reason to believe that a single stock should grow in perpetuity.
Real estate is not like stocks. Some people speculate with real estate prices, but commercial and residential real estate serve tangible functions. People live in houses and condominiums. Businesses operate out of commercial property. Physical property has value in and of itself.
This introduces two conflicting phenomena. On the one hand, existing real estate structures should naturally lose value over time through wear, tear and depreciation. An unmodified home has no reason to grow in value over time; all of the floors, ceilings, appliances and insulation age and becomes less valuable.
On the other hand, the average homes built in 2015 were unquestionably superior to the average homes built in 1915. While existing structures shouldn't gain value, new structures should be more valuable on the basis of their structural and functional improvements.