It is difficult to make a statement of whether real estate is better than stocks or real estate beat stock. The main reason for that is both falls in different categories, and both industries operate in different dynamics. Even the statistical comparison will be a difficult thing as there are different kinds of returns involve in both types. Moreover, it also depends upon the investor. Does he think about a long term investment or a short term? Does he need regular income, or is he planning to reinvest? What is an investor’s risk tolerance? How much money does he have to invest? Is he looking to cover up his education expenses or planning a wealthy retirement? These factors form the basis of decisions about investment.
Even if we talk statistically and make a comparison between real estate and stocks, real estate has outperformed stocks on many grounds. If we compare real estate and stocks on value and return basis from the year 2000 and onwards, real estate yielded a 10.71% annual return while stocks yielded 5.43% annually. As the stats say, real estate beats investing in stocks easily. The year 2020 will bring even better results for the real estate industry. Here are some reasons why:
Low mortgage rates:
the Year 2020 will see a further decrease in mortgage rates. The national association of realtors has predicted that the real estate industry will have further growth this year. The rate of mortgage will drop further from 4% to 3.8% in the year 2020. Besides, sales of new homes will reach a figure of 750,000 this year. Demand will be slightly on a higher side as compared to the supply because buyers will have lesser homes to choose from,as compared to the last five years, and this will boost up the housing industry. Moreover, the average median price for an existing house is likely to reach $270,400 in 2020, which is 4.3% higher as compared to 2019.
“Great recession” aftershocks:
If we looked back ten years ago, approximately 66 percent of adults in the United States had investments in stocks. However, this scenario changed after the Great Recession, which triggered issues like job security, financial stability, return on investment stability, etc. and this had struck fear in investors. A large number of investors pulled out their money from the stock market. That figure of 66% reduced to almost 50% by the year 2016. People are still trying to recover from the shocks of the great recession, and financial advisors are encouraging people to invest in stocks, but things look gloomy as far as this matter is concerned. People are hesitating in investing in stocks and preferring to invest in real estate beat stock or going for saving options.
Price fluctuations in the stock prices of “giants”:
the Year 2020 saw a frequent variation in the stock prices of some industry giants. Now, if you are investing in stocks, you always know the risk factors involved in it. Therefore, people prefer to invest in more consistent corporations (blue-chip companies) because they are more consistent as far as dividends and stock growth are concerned. Some companies gained significant appreciation in the value of their stocks, but many giants struggled so far in 2020. Let us have a look at stock prices of a few blue-chip companies:
|Company||Stock price on January 23||Stock price on February 21|
|Apple||319.23 USD||313.05 USD|
|219.76 USD||210.18 USD|
|Disney||142.20 USD||138.97 USD|
|Exxon Mobil||66.67 USD||59.13 USD|
|Alphabet||1484.69 USD||1483.46 USD|
Blue-chip companies are renowned for their consistent market growth and regular dividends. But, things have been a little “shaky” for them as well.
Stock investment needs “heavy money” now:
There is a universally accepted fact that you can start investing in stocks with even 100USD. That was a feasible option a few years ago but the time has changed a lot. Since the great recession, people are reluctant to invest in stocks and that too in new or less famous companies. This leaves them with only one option, and that is investing in blue-chip stocks. But, when you talk about these blue-chip stocks, you simply cannot start with a small investment as it will not help your cause. Here is the list of stock prices of some blue-chip companies:
Now imagine, you want to buy stocks of Amazon, and for that, you need 2000USD to buy one share. But why would you buy only one share? What good will that do to you? Definitely, you will have to purchase more shares if you are looking to reap the rewards.
Let us assume that you decide to buy twenty shares of Amazon, so the amount you are going to invest roughly 40,000USD. Think again, you are going to buy twenty shares for $40,000. Just for a moment, think about the alternative. What if you pay those 40,000USD as the down payment and buy a property worth 400,000USD on the mortgage and rent out that property. Now, you will be getting rental income, and you can pay the remaining installments, and in the end, you will be the owner of that property. Your property, which had a market price of $400,000 at that time is worth a lot more than $400,000 now.
If you evaluate it technically, you paid only $40,000 from “your pocket” for a property of $400,000 because rest was paid through the rental incomes, and, after the completion of installment, your property is a lot more than $400,000. Do you think that your investment in those twenty shares could yield this much return and price appreciation? Well, to be honest, it is very highly unlikely.
Let us have a look at some other factors that can place real estate above the stocks easily:
Liquidity of stocks- a disadvantage:
Stocks are considered as a liquid investment, which means you can sell your stocks easily and quickly. This is a great benefit of investing in stocks. But it can be a disadvantage as well. How? Assume that you invested in stocks of a certain company, and prices started falling. As a normal investor, you are emotionally attached to your investment, as most stock investors are. With the prices going down, your instincts will push you to sell your stocks to avoid further loss. Price fluctuations are highly associated with stock markets, and most investors sell their stocks when they see a consistent decreasing trend in prices. This scenario perfectly describes this narrative “most investors buy stocks when the prices are high and sell them when prices are low.”
Now, let us discuss this liquidity option concerning real estate beat stock. Liquidity is something that is not commonly associated with real estate. Even if you are an emotional investor and so desperate to sell your property due to a slight temporary market downfall, it may take days or even weeks to find a buyer and make a sale transaction. Meanwhile, what if you change your mind? What if the market shifts its momentum to the “winning ways”? Well, this can happen, and the ability to not sell your property immediately or readily can prove to be fruitful for you.
As mentioned above, real estate beat stock has humbled stocks as far as the returns are concerned. However, some studies concluded that stocks yielded higher returns as compared to real estate after considering the inflation factor in the last fifty years or so. Well, other things also need consideration. For example, real estate properties yield monthly income in the form of rentals, but companies do not give monthly dividends. In fact, many companies do not give dividends even annually (they opt to reinvest).
Although the price appreciation factor is common in both investments, monthly income is only associated with real estate. Not only this, real estate gives more tax advantages as compared to stocks. For example:
- Tax rates are lower for the gains on proceeds from the sale of properties as compared to profits on stocks. Moreover, there are certain cases where real estate beat stock profits are completely exempt from any kind of taxation (stocks does not provide this luxury).
- Expenses incurred for the betterment (renovation) or maintenance of a property are deductible from the income for tax purposes (you cannot do that as far as stocks are concerned).
- According to accounting principles, buildings can be depreciated over a time period, and this depreciation expense is a deductible expense for taxation as well (you cannot charge depreciation against a stock).
Even if we remove the “return and reward” factor, real estate still provides so many benefits that stocks do not. Real estate provides consistency, emotional stability, and is a relatively much safer investment than stocks. With the price fluctuation in stock markets and the after-effects of the great recession, people are looking for a safer option and consistent options like real estate. Moreover, positive and favorable forecasting from recognized national institutions, real estate seems to be a stronger choice for investors in 2020.