Why Real Estate Beats Stocks During a Recession
G. Brian Davis is a landlord, personal finance expert, and financial independence retire early (FIRE) enthusiast, whose mission is to help everyday people create enough rental income to cover their living expenses.
Besides owning dozens of properties over nearly two decades, Brian has written as a real estate and personal finance expert for publishers including Money Crashers, RETipster, Think Save Retire, 1500 Days, Lending Home, Coach Carson, and countless others.
Here’s to financial independence with real estate!
In the midst of the current coronavirus induced bear market, investors across the world have found themselves wondering what to do with their assets. Should they sell and cut their losses? Or if they have cash handy, should they buy assets while they’re down?
A global recession feels inevitable at this point, but no one knows where to buy replica hermes scarves
how long it will last or how deep it will go. Every day seems to bring new (and mostly bad) news about the public health crisis due to COVID 19 and the economic fallout from shuttering businesses worldwide.
As both a real estate investor and a stock investor, I’ve been reviewing data from past recessions to get a sense of what’s in store this time around. Sure, my stock portfolio has been hammered. I’m having trouble completing renovations on a vacant rental property and worry about filling it with a reliable tenant in the midst of this mess.
But I’m also setting aside as much cash as I can to invest, because assets are on sale. And that window won’t stay open long.
First, a Brief Overview of Volatility
Stocks are extremely liquid; real estate is extremely illiquid. You can buy and sell stocks instantly, and for free. Real estate typically takes months to buy or sell and costs thousands of dollars to do so.
That lack of liquidity is typically a disadvantage in real estate versus other asset classes. But it comes with a huge perk as well low volatility.
Because investors can buy and sell stocks instantly and at no cost, they do. Millions of transactions take place on stock exchanges around the world every single day. And each buy or sell order sends stock prices moving up or down.
We’ve now seen several days over the last month with double digit stock index swings. Can you imagine nationwide home prices swinging by 11 percent in a single day? Of course not. Home prices move at a glacial pace compared to stocks because they’re so slow and difficult to transfer.
In an analysis of stocks versus real estate over the last 145 years, real estate saw half the price volatility compared to stocks. Given that volatility is a form of risk, it makes real estate an inherently less risky investment. economy out of the slide. Home prices typically flatten or slightly decline, developers stop building homes for a spell, and then demand catches up to the lack of new supply and suddenly buyers start driving up prices again.
Homebuilders get back to work, and Realtors, appraisers, title companies, lenders, furniture sellers, movers, and contractors all see a surge in business.
Take a quick look at this graph showing home prices since 1975, courtesy of Seeking Alpha:
The enormous exception, of course, is the Great Recession, which was largely caused by the housing market, making it a unique outlier (more on that later).
Stocks in Recessions
Stocks make for another story when recessions rear their ugly head. history, stocks have fallen. No, not fallen plummeted. See for yourself, in this graph of the S 500 courtesy of Macrotrends:
In some cases, the drop didn’t hurt too badly, while others were so bad that entire lifetimes of wealth disappeared. In the Great Depression, the S 500 fell by a terrifying 86 percent. More recently, in the Great Recession, the index fell by 54 percent.
The Great Recession as a Housing Outlier
They had grown too high and too fast in the housing bubble of the mid 2000s. And they fell hard, toppling 33 percent from peak to valley an enormous fall, a collapse even, by any calculation.