The Best Investment of the Decade? Real Estate.

If you were an investor in the 1990s, would you have done better with stock or real estate?

Speaking before the National Press Club, Fannie Mae Chairman and CEO Franklin D. Raines offered this analysis: It's January 1990. Three individuals have just received a $10,000 year-end bonus. And they're trying to decide what to do with the windfall.

John decides to invest his $10,000 in the stock market, and being conservative with his finances, he puts the money in an index fund of S&P 500 stocks.

Bill is excited by the possibilities of the Internet and all the new technology companies, so he puts his $10,000 in a Nasdaq index fund.

Mary has never invested in the stock market. But she's tired of paying rent every month with nothing to show for it. So she put her $10,000 down on a bungalow listing for about $80,000.

It's about 12 years later. Assuming they all had to pay for shelter every month, how would you say John, Bill, and Mary did on their $10,000 investment? Who came out better?

Since 1990, the value of the S&P 500 more than tripled. So from his initial investment of $10,000, John made about $22,000, pre-tax.

During the same period, the value of the Nasdaq quadrupled. So Bill's gain was roughly $30,000, pre-tax.

What about Mary? During the same period, home values increased roughly 4 percent per year nationally. At that rate, the house that Mary bought for $80,000 is now worth about $126,000. And if she sold it, she would have a profit of about $46,000. And that gain would be free of capital gains taxes.

" It is extraordinary," said Raines, "that after the longest, strongest bull market in history, the average American built more wealth owning a home than in the stock market."

" Most Americans invest and earn more in their homes than they invest and earn from their savings accounts, IRAs, stocks, bonds or other investments," he said.

" During the past ten years, the average stockholder earned $23,000 in the stock market, while the average homeowner earned $44,000 in home equity. Home equity remains the cornerstone of most family wealth."

But even if the returns from stock market investments and homeownership were the same, real estate would still yield a better net result. Why? While profits from the sale of stock are generally taxable, profits of up to $500,000 for a married couple (and as much as $250,000 for single owners) are typically shielded from taxes when a prime residence is sold.

Furthermore, since the interest on your mortgage and your property taxes are both tax deductible, the government is essentially subsidizing your home purchase.

Your rate of return when buying a home is higher than most any other investment you could make.