Americans feel at home in the real estate market.
When asked their preferred way to invest money they won’t need for more than 10 years, Americans’ No. 1 choice is real estate, according to a survey of more than 1,000 adults from personal finance firm Bankrate.
Indeed, about one in three Americans now say real estate is their preferred way to invest for the long-term — the highest percentage to date. The stock market is a distant second, with 20% choosing it as their top choice for a long-term investment vehicle.
“The reason most people feel real estate is the most preferred option is because it is tangible and they understand it,” explains certified financial planner Mitchell C. Hockenbury of 1440 Financial Partners in Kansas City, Mo. And Greg McBride, Bankrate’s chief economist, notes that the tangible nature of real estate “likely makes it seem less prone to loss than the more abstract ownership stake in publicly traded companies held in your ETF.”
Meanwhile, “buying equities isn’t tangible to most,” adds Hockenbury. And McBride notes that “the short-term drops in the stock market do seem to have an outsized impact on how individual investors view risk, even though that risk diminishes over longer holding periods.”
The issue, though, is that prioritizing real estate over stocks in your long-term investment strategy could be costly. “Which fares better over long periods of time? The stock market. Hands down. Not gold, not houses, not oil ... stocks,” says Hockenbury.
Indeed, some data shows this. An analysis of home-price indexes from the Federal Housing Finance Agency and S&P 500 prices from 1991 to 2017 found that “stocks have dramatically outperformed housing prices,” notes Business Insider. Case-Schiller Housing Index data shows that the average annualized rate of return for housing was 3.7% from 1928 to 2013; meanwhile stocks racked up 9.5% annualized gains, Investopedia notes. (Also see MarketWatch’s 7 reasons stocks are better than real estate.)
“Over long investment horizons, the stock market has historically provided the best returns,” concludes Greg McBride. “Of course as every disclaimer says, past performance is no guarantee of future results. But diversifying your money across hundreds or even thousands of companies with a very modest sum of money and near zero fees is a very efficient way to invest and increases the odds of success. Real estate, by contrast, is very capital intensive – there are lots of transaction costs coming and going, and lots of maintenance and upkeep in the interim. Finally, residential real estate has appreciated more slowly than the stock market.”
Of course, there are plenty of exceptions to this rule. “Not all real estate is equal: Prime property in an area that became a hot vacation spot is going to do a lot better than an investment in an area that lost a huge business and the jobs that went with it,” says certified financial planner Bobbi Rebell, host of the Financial Grownup podcast and co-host of the Money with Friends podcast. Plus, for many people real estate is far more than an investment: They may put the biggest bulk of their money into a home, but they also get the benefit of living in it. And of course, historical returns don’t predict future ones, so this could change.
Still, experts say that those who prefer real-estate may want to take a look at their investment strategy. “Stocks have historically been tremendously successful in creating wealth and even more so when you factor in dividends which when reinvested can really power an equity portfolio higher,” concludes Rebell. “For stocks, there is also pretty much always liquidity — and it doesn’t have to be all or none, you can sell a portion of a portfolio if you have a cash need.”