• Bernhardt Wealth Management

Stocks or Real Estate: A Fresh Look

From time to time, we like to go back into our blog archive to look at topics we’ve covered in the past. It may not surprise readers to learn that in the financial markets and investing, the proverb, “Everything that was old is new again” is often accurate. In this article, we’re taking a new look at just such a topic from the past: comparing the investment performance of the stock market to real estate. Given the dramatic runup in real estate prices—and especially home prices—over the last couple of years, it seemed like a good time to take a new look at an old question: which is the better investment—stocks or real estate?

Almost everyone knows the three most important factors for investing in real estate: location, location, and location. Certainly, over the last several years, we have seen wildly different changes in the value of both residential and commercial real estate, with much of the variance determined by the geographic region and how that particular region was affected by various economic trends, whether the housing bubble and the collapse of mortgage-backed securities, or the downturn in manufacturing that decimated the value of much commercial property in the Northeast and upper Midwest. More recently, the pandemic coincided with what was, to some, one of the most impressive and surprising surges in residential real estate in decades.

It is also true that many of the largest fortunes in this country have been amassed in the real estate industry—a recent occupant of the White House comes to mind. So, is real estate really all that risky? After all, as the other saying goes, they aren’t making any more land. Especially compared to the notorious ups and downs of the stock market, wouldn’t it be a good idea to have some of your investment portfolio in real estate?

The answer, as is often the case with such questions, is, “It depends.” From the beginning of 1999 to the end of 2004, US real estate prices, as valued by the Office of Federal Housing Enterprise Oversight, increased more than 56 percent. During that same period, the S&P 500 lost about 6 percent of its value. From 2004 to 2022 (a period that encompasses the collapse of the housing bubble that contributed to the onset of the Great Recession in 2007–08), the index of housing prices, as measured by the St. Louis Federal Reserve Bank, increased by 92%. During that same period, the S&P 500 went from 1,144.94 (at the end of 2004) to 4,108.54 (its most recent close): an increase of about 259%.

But what if you look at a longer time horizon? From the beginning of 1980 to the end of 2004, for example, home sale prices increased 247 percent. Not bad, right? But during that same period, the S&P 500 increased in value by more than 1,000 percent. Looking at a more recent period, US residential real estate returned 21 percent from 2010 to 2015; during that same period the S&P 500 returned 75 percent. Going all the way back to 1975 and continuing through the end of 2015, US residential real estate achieved an aggregate return of 595 percent, compared with a 2,352 percent increase in the value of the S&P 500. From 2015 to the present, home prices (as measured by the St. Louis Fed) have risen by about 65%; the S&P 500 is up almost 97%.

Of course, there are reasons to own real estate other than the return on investment. Home ownership has a value to most of us that far exceeds the strictly financial considerations. For those who earn their livings from the land, owning farm or ranch property is a way of insuring continued independence and some measure of control over the means of production. And if an individual has deep familiarity with the business and economic cycles in a given community, that knowledge can often be leveraged to create returns on investment much higher than national averages might indicate. So, it often makes good sense to have some portion of your assets invested in real estate. A qualified financial advisor can review your complete portfolio and help you assess the appropriateness of your current asset mix, whether that includes stocks, bonds, real estate, or other valuable assets.

At Bernhardt Wealth Management, these are the decisions that we assist our clients in making, every day. And in every case, the guidance and research we provide is delivered with the client’s best interests foremost—always. To learn more about how you can make smarter choices about your financial advisor, click here to read our recent article, “Finding the Right Wealth Manager for You.”

Buen Camino!

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