The rent on a house is comparable to the dividend on a stock. If a house rents for $1,000 a month, that is $12,000 a year, or 4.0 percent of the $300,000 price.

The implication of the foregoing is that in one of the least affordable housing areas in the country, the "dividend yield" on a house is 4.0 percent, compared with 2.5 percent in the stock market. This is a very large and unusual gap (often since World War II stocks have had a higher yield than houses). It can be rationalized by assuming that people expect houses to appreciate less than stocks, but in that case I wonder if people are overly ready to extrapolate the recent past.

Suppose that the "equilibrium" dividend yield on stocks and houses is 3.0 percent. If prices adjust to reach that equilibrium, then stock prices would have to fall about 20 percent and house prices would have to rise about 25 percent. Based on that analysis, it seems to make more sense to buy a house than to invest in the stock market.

This type of economic/financial analysis easily can go wrong. For more on the rent vs. buy decision, see Rent vs. Buy or the article on the generic formula used in this analysis.

November 1996 update. Since this article was written, stocks have appreciated considerably, while very few real estate markets have gone up by as much as 10 percent. That could mean that real estate is an even better choice today. But it certainly means that taking my advice is not always right!