Personal Finance

Why Real Estate Beats Stocks During a Recession

Expertise: Landlording & Rental Properties, Real Estate News & Commentary, Personal Finance, Real Estate Investing Basics
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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?

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A global recession feels inevitable at this point, but no one knows 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.

Investmments and asset allocation concept. Where to Invest? Newspaper and direction sign with investment options

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.

So how has real estate fared in recessions past, compared to stocks?

Related: 7 Hard-Won Lessons From the Last Recession That Will Help You in 2020

Real Estate in Recessions

In most recessions, real estate has actually helped pull the U.S. 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.

In every single recession in U.S. history, stocks have fallen. No, not fallen—plummeted. See for yourself, in this graph of the S&P 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&P 500 fell by a terrifying 86 percent. More recently, in the Great Recession, the index fell by 54 percent.

Woof.

The Great Recession as a Housing Outlier

In the last recession, fueled in part by falsely-graded subprime mortgage derivative investments, U.S. home prices took a beating.

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.

Yet that fall was still more than 20 percentage points fewer than the S&P 500 fall.

Think about it: Even in the one recession largely caused by real estate, home values still fell far less than stocks did.

Perhaps surprisingly, rents don’t tend to decline during recessions. Even during the Great Recession, they merely flattened for two years.

Why? Because demand for rental housing goes up as demand for homeownership pulls back.

Row of colorful, red, yellow, blue, white, green painted residential townhouses, homes, houses with brick patio gardens in summer

Related: Recession Prep 101: Investing in Real Estate During a Financial Crisis

Homeownership Rates and Stock Ownership Rates

The U.S. homeownership rate reached an all-time high in 2004 at 69.2 percent. It remained high until the housing bubble burst during the Great Recession and then fell to a 50-year low of 62.9 percent.

You remember the foreclosure wave—I don’t need to remind you. All those people became renters, at least temporarily, helping to buoy rents.

In the years since reaching that 50-year low in 2016, the homeownership rate climbed back up to 65.1 percent in the fourth quarter of 2019. And despite popular opinion, homeownership isn’t appropriate for everyone and comes with its own downsides. I’ve been a homeowner and I’ve been a renter, and they both have their pros and cons.

Stocks are another matter entirely—everyone should own some stocks, even if their asset allocation differs based on age, risk tolerance, and a dozen other factors. Yet lower- and middle-class Americans got spooked away from stocks in the aftermath of the Great Recession and had just barely started dipping their toes back in those waters again when the coronavirus ripped apart stock markets around the world.

In 2004, 63 percent of Americans owned stocks, according to a Gallup report. By 2013, that figure had fallen to 52 percent. Since then, it’s gradually edged back upward to a meager 55 percent. Get ready for it to fall again.

The problem is that lower- and middle-class Americans only get in on the action with stocks after they’ve already had a strong run, a charging bull market. Read—they buy high.

Then the market crashes and they panic and pull their money out of the market. Read—they sell low.

It is the wealthy who leave their stocks untouched during bear markets. And it is the wealthy who funnel more money into stocks when everyone else is screaming that the sky is falling.

Thus, it’s the wealthy who benefit most from the stock market recovery after a recession. Many point out how unfair it is, but the answer isn’t to empty the wallets of savvier investors. It’s to educate the lower and middle classes so they become savvier investors.

Final Thoughts

Ultimately, people still need housing—even in a recession. They may not be willing to go into as much debt to buy it, but demand for a roof over your head doesn’t go away. Some folks downsize, others sell their homes (at lower prices) and become renters. But demand doesn’t disappear, even as new supply stops being built.

But people don’t need to hold their stocks during recessions. They should, but they don’t. So stocks prices tumble, even as housing remains relatively steadfast.

I, for one, plan to buy as much real estate and stock as I can afford. Which granted, isn’t a lot right now, given the current crisis. But when others rush to sell, it’s usually a good time to buy.

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How are you reacting financially to the coronavirus bear market? Are you planning to invest? In what, and why?

Let us know in the comments below.

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 ...
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    Barry H. Investor from Scottsdale, AZ
    Replied 6 months ago
    BRIAN - I concur with your conclusions. I made it through 2008-2012 with my rentals evaluated at 50% of what I bought them for (AZ), but they were occupied, and rents dropped a little, but in terms of the "dividend" yield, rentals were much better than the 1-2% typical dividends of stock positions during that same time. As a Turn Key Seller of tenant occupied 100% Remodel Rentals in Kansas City MO with my Seller-financing, I feel confident about weathering the storm. Being able to produce 20%+ annual returns for my Buyers starting Day 1, I have a suspicion I will not be able to keep up with demand !!
    G. Brian Davis from Baltimore, MD
    Replied 6 months ago
    Glad to hear you're well positioned to weather this storm Barry! And I agree, there will be some refuge in real estate in the coming economic crisis following the public health crisis.
    David A.
    Replied 6 months ago
    This is such a REI tunnel vision site it makes me want to puke. You should have a diversified portfolio that included BOTH stocks and real estate. There a time to buy and a time NOT to buy for each of them, and the time to buy real estate sure a shit isn't right now.
    Samuel Pentowski
    Replied 6 months ago
    @David Abbate I'm not sure what you expected from a website whose primary focus is real estate. Do you expect numerous and quality articles about real estate on a webpage dedicated to the stock market? You certainly do not, so if you come to a real estate forum designed and focused on real estate investing and somehow are surprised that the focus is real estate please realize your error and seek a different forum for stock market related things.
    G. Brian Davis from Baltimore, MD
    Replied 6 months ago
    A) Don't be a jerk, it's unbecoming and immature. B) I never said don't buy stocks. I have been buying and continue to buy stocks through this bear market, and look forward to excellent returns on them. The article centers around stability versus volatility, not opportunity.
    Dave Rav from Summerville, SC
    Replied 6 months ago
    I also agree with this article. I own both RE and stocks, so I'm not biased. But yes, RE beats stocks on most fronts. Another reason - you have a little bit more control over the RE asset. Also, I want to challenge your liquidity statement. Although NOT as liquid as stocks, RE does not have to be sold to get the cash out. You can take out a loan against the property (mortgage, HELOC, whatever) within a matter of a couple weeks (not months). Just wanted to mention..
    G. Brian Davis from Baltimore, MD
    Replied 6 months ago
    Very true Dave - you can use debt to access equity, and usually faster than seller. Although it still takes around 30 days on average to refinance a property, compared to instantaneous stock sales. But the lower liquidity of real estate is one of the main reasons why it's so much less volatile than stocks, so the lower liquidity is not all downside.
    Dave Rav from Summerville, SC
    Replied 6 months ago
    Thx!
    Vaios Theodorakos
    Replied 6 months ago
    The problem is we are nowhere near the end or the bottom and no cure for 18 months 12 at least so how do people and the world go back to work .... stocks need to go down much further and the real blood in Realestate is yet to hit the streets
    G. Brian Davis from Baltimore, MD
    Replied 6 months ago
    I agree that until we have a firm understanding of the scope and end of the public health crisis, we can't know the full extent of the economic crisis. With my stocks, I'm dollar cost averaging weekly. With real estate, I'm keeping a watchful eye on when eviction bans lift, and plan to invest more money when landlords have recourse again.
    Curt Todd Investor from Happy Valley, OR
    Replied 6 months ago
    How do you see real estate stocks (REITS, DSTs, etc.), holding up in either market swing (up or down)? Are they affected as much as the regular stock movements? Is it savvy to buy them when other stocks are in 'bear' mode, like it is for real estate investments?
    G. Brian Davis from Baltimore, MD
    Replied 6 months ago
    Yes I think there will be an opportunity with REITs, particularly those specializing in residential real estate. I think at their low, they'll be extremely undervalued.
    John Mahady Investor from DuPage, IL
    Replied 6 months ago
    I generally agree with your analysis but need to add some factors unique to the current environment. Firstly, AirBNB is going to cause initial selling secondly, the percentage of investors in the RE market is probably higher this time then most past recessions. Thirdly, republican or local/state governments that will not need tax revenues and see landlords/RE investors as captive sources. Surviving RE investors will have at least some of the following: sufficient reserves, renters with non-cyclical and non-luxury jobs, low cost of funds.
    G. Brian Davis from Baltimore, MD
    Replied 6 months ago
    I definitely agree real estate investors should keep large cash reserves throughout this crisis. Cash is king during any crisis!
    Cole Oraham Real Estate Agent from Clemson, SC
    Replied 6 months ago
    I think one thing that was true in the past is not so true with the current and future market. In the previous decades, home prices were not as steep. People were also not as highly levered. With the higher prices and increased leverage, I think that it could mean that housing prices will experience more volatility in the future (in comparison to that of the past). I prefer real estate over equities, bonds, precious metals, etc., but I also don't think that past performance necessarily correlates with future performance. Just playing devil's advocate. I love reading your articles and your view point on things, Brian Hope everyone is staying safe and healthy!
    G. Brian Davis from Baltimore, MD
    Replied 6 months ago
    Great point Cole - home prices today are high relative to incomes, and while American home's aren't as overleveraged as they were in the Housing Bubble, they're certainly more leveraged than they were a generation ago. It will be interesting to see how this crisis plays out in real estate markets, and I do think there will be plenty of deals to be found.
    Rock Stevens Investor from Houston, TX
    Replied 5 months ago
    G. Brian Davis, this is absolutely impeccable content! Thank you for posting this, it allows insight into volatility that most typically wouldn't consider. I completely agree with the trends that we have seen over history and studying the differences between the stock market vs. real estate during times of economic contraction. I've always believed that when others contract, it's time to expand! Using economies of scale also provides stability and one way to achieve that through real estate is multi-family rather than single-family homes. Multi-family real estate allow for several incredible benefits to hedge against market volatility during economic recessions. Thanks again for the incredible content!