Real estate in portfolio?

Harry Browne, the libertarian diplomat, politician, and investment guru, never considered real estate in its permanent portfolio. Why? He thought it was too speculative. He might be right. However, even though we have seen a pretty tough crash in real estate, it hasn't been horrible in well-located areas. If we compare it to stocks, 20% down is somehow acceptable.

On the chart, you can see 2 different curves trying to show the average price of real estate in USA, according to different methodologies. First, we notice that the curves are not properly correlated. This just proves the difficulty of valuing the real estate market. Second, we can feel some recovery towards the mean in the last years. Some will say it's a faked one based on low interest rates and QE. Probably it's true, but it's the same it is happening in the stock market.

To create a permanent portfolio, some investors put real estate aside and they just play with stocks, gold, bonds, and cash. Others prefer to include real estate as they feel that it's poorly correlated with the rest of assets. Then, what's the correlation between stocks and real estate?

We have tried to find the above relationship during the last 50 years. The results are not conclusive, but, at least, they show there is no clear positive correlation between stocks and real estate which could be enough to include real estate in a permanent portfolio.

On the other hand, real estate has one problem and one advantage: it cannot easily be divided, and it can easily be leveraged, respectively. Real estate is not such a great asset if it is not accompanied by a mortgage. Perfect location, plus mortgage, plus not defaulting, plus patience, plus less than 40% of total wealth are the characteristics to make a good investment out of real estate. In this case, it makes sense to add it to our permanent portfolio.