{"id":183748,"date":"2025-07-10T08:44:21","date_gmt":"2025-07-10T14:44:21","guid":{"rendered":"https:\/\/www.biggerpockets.com\/blog\/?p=183748"},"modified":"2025-07-10T08:44:53","modified_gmt":"2025-07-10T14:44:53","slug":"is-real-estate-protecting-you-from-overpriced-stocks","status":"publish","type":"post","link":"https:\/\/www.biggerpockets.com\/blog\/is-real-estate-protecting-you-from-overpriced-stocks","title":{"rendered":"How Well Does Real Estate Hedge Against an Overpriced Stock Market?"},"content":{"rendered":"\n

By historical metrics, the U.S. stock market <\/span>is overvalued<\/span>\u2014to put it mildly. The S&P 500 has a price\/earnings (P\/E) ratio of <\/span>28.75<\/span><\/a> at the time of this writing, compared to a median of 20.28 from 1970 to today. The \u201cBuffett Indicator,\u201d or the ratio of a country\u2019s total stock market value to its total GDP, is currently <\/span>207.7%<\/span><\/a>, compared to a healthy number in the 100%-136% range. <\/span><\/p>\n\n\n\n

And that says nothing of the unpredictable trade policies in Washington <\/span>right now<\/span>. <\/span>Investors have <\/span>grown<\/span> complacent <\/span>over<\/span> tariff policies<\/span><\/a>, inflation risk, and recession risk.<\/span> <\/span><\/p>\n\n\n\n

Stock market crashes are part of market economics. The question isn\u2019t if, but when, the next stock market crash will hit. <\/span><\/p>\n\n\n\n

As a real estate investor, that raises an important question: How well do real estate investments insulate you from stock market crashes? <\/span>It turns out there<\/span> are several answers to that question.<\/span> <\/span><\/p>\n\n\n\n

Corrections<\/span><\/h2>\n\n\n\n

Sometimes, stock investors <\/span>just<\/span> bid <\/span>up prices<\/span> too high.<\/span> The market then corrects, with prices dropping back down to levels justified by company revenues and projections. <\/span><\/p>\n\n\n\n

That doesn\u2019t hurt real estate investors at all. It\u2019s healthy and normal in any market, where prices are determined by what buyers and sellers are each willing to accept. <\/span><\/p>\n\n\n\n

Geopolitical Risk<\/span><\/h2>\n\n\n\n

Geopolitical risk feels higher than usual right now. Several hot wars continue raging, the U.S. recently bombed an ally <\/span>to<\/span> Russia and China, and foreign policy out of the White House feels unpredictable. <\/span><\/p>\n\n\n\n

Stock markets react <\/span>badly<\/span> to geopolitical events.<\/span> They don\u2019t necessarily crash into bear markets, but news of wars, air strikes, diplomatic tensions, and trade wars all send stock investors ducking for cover. <\/span><\/p>\n\n\n\n

While real estate doesn\u2019t exist in a vacuum, it\u2019s far more local than stocks. Local property values and revenues <\/span>are based<\/span> on local market conditions, rather than conflicts taking place half a world away that might snarl supply chains, but won\u2019t put local workers out of their jobs. That makes most real estate investments pretty insulated from geopolitical risk. <\/span><\/p>\n\n\n\n

Read this thought exercise for how <\/span>real estate would perform if a new world war<\/span><\/a> broke out today. <\/span><\/p>\n\n\n\n

Recession Risk: Income<\/span><\/h2>\n\n\n\n

Recessions hurt business income and real estate income alike. <\/span><\/p>\n\n\n\n

In a recession, consumers spend less, businesses earn less, and they cut workers or freeze hiring. <\/span>On the residential side, <\/span>that<\/span> means higher rent defaults, turnover rates, and vacancy rates, <\/span>and<\/span> more household bundling (adults moving in together instead of living independently).<\/span> <\/span><\/p>\n\n\n\n

On the <\/span>commercial<\/span><\/a> side, the same thing happens with office and industrial tenants. <\/span><\/p>\n\n\n\n

Even so, rental income doesn\u2019t disappear. Rents might dip slightly, and landlords may have to offer more concessions. But for anyone relying on real estate income, such as retirees and professional investors, they\u2019ll still collect it.<\/span><\/p>\n\n\n\n

There are also <\/span>plenty of<\/span> recession-resilient real estate investments<\/span><\/a> out there<\/span>.<\/span> Every month, I invest as a member of a co-investing club<\/span>, <\/span>which<\/span> has <\/span>kept an eye out for<\/span> recession-resilient investments over the past year.<\/span> <\/span><\/p>\n\n\n\n

Stock investors will see lower or paused dividends. <\/span>But where<\/span> they\u2019ll <\/span>really<\/span> suffer <\/span>is in<\/span> prices, especially among retirees who rely on selling off stocks to pay their bills.<\/span> <\/span><\/p>\n\n\n\n

Recession Risk: Prices<\/span><\/h2>\n\n\n\n

Going back to 1957, the S&P 500 declined by an average of <\/span>31%<\/span><\/a> in the <\/span>last<\/span> 10 recessions.<\/span> <\/span><\/p>\n\n\n\n

In contrast, home prices don\u2019t necessarily drop in recessions. Four of the last six recessions <\/span>actually<\/span> saw <\/span>home prices increase<\/span><\/a>. And while REITs do crash in recessions, they also <\/span>rebound before other asset prices<\/span><\/a>. <\/span><\/p>\n\n\n\n

So why does real estate fare so much better than stocks in recessions? <\/span><\/p>\n\n\n\n

Because in recessions, the Federal Reserve cuts interest rates to juice the economy. <\/span>And that makes both residential and commercial real estate more affordable, <\/span>so<\/span> buyers <\/span>can and do<\/span> offer higher prices.<\/span> <\/span><\/p>\n\n\n\n

Commercial real estate prices <\/span>are based<\/span> on <\/span>cap rates<\/span><\/a>, which move in near lockstep with interest rates. <\/span>When interest rates and <\/span>cap<\/span> rates drop, property values rise.<\/span> <\/span><\/p>\n\n\n\n

As a passive real estate investor with partial ownership in over 3,500 units, recessions don\u2019t keep me up at night. <\/span>I <\/span>worry<\/span> more about the risk of sustained high interest rates <\/span>due to<\/span> inflation.<\/span> <\/span><\/p>\n\n\n\n

Inflation Risk<\/span><\/h2>\n\n\n\n

Inflation is a mixed bag for real estate investors. <\/span><\/p>\n\n\n\n

On the one hand, it drives up the nominal property values and rents. For investors with long-term fixed-interest loans, that\u2019s all upside. The monthly loan payment stays fixed in yesteryear\u2019s dollars, while rents and values shoot through the roof. <\/span>That<\/span> works out <\/span>especially<\/span> well for residential investors with <\/span>one-to-four-unit properties<\/span>.<\/span> <\/span><\/p>\n\n\n\n

The downside is that the Federal Reserve raises interest rates to combat inflation. That sends cap rates higher, which means lower property values for commercial real estate. <\/span><\/p>\n\n\n\n

Not all commercial properties suffer. Properties with longer-term, fixed-interest debt can enjoy higher cash flow from surging rents. They don\u2019t have to sell while cap rates are high; they can wait for a better seller\u2019s market. <\/span><\/p>\n\n\n\n

The problem is that many commercial real estate investors use short-term, floating-interest debt. When we vet investments together in our co-investing club, we pay close attention to the operator\u2019s loan terms. We want to see plenty of runway for operators to rake in higher rents during periods of inflation without being forced to sell or refinance in a high-interest market. <\/span><\/p>\n\n\n\n

As for stocks, they don\u2019t perform as well as real estate during periods of inflation. <\/span>But<\/span> they certainly <\/span>do better than<\/span> bonds.<\/span> In periods of rising inflation, real estate has returned an average of <\/span>10.6%<\/span><\/a>, compared to 7.3% for global equities and 0.5% for Treasury bonds. <\/span><\/p>\n\n\n\n

Stagflation Risk<\/span><\/h2>\n\n\n\n

Recessions alone don\u2019t crush real estate investors. Neither does inflation alone. <\/span>The scariest risk to real estate investors comes from stagflation<\/span>: <\/span>a weak economy<\/span>, <\/span>coupled with high inflation.<\/span> <\/span><\/p>\n\n\n\n

In times of stagflation, central banks <\/span>are caught<\/span> between the rock of recession and the hard place of inflation. If they cut interest rates, it might help jump-start the economy, but it can also spur inflation. The opposite happens if they raise interest rates. <\/span><\/p>\n\n\n\n

That\u2019s what worries me the most about Trump\u2019s tariffs: They both hurt the economy and drive up inflation. <\/span><\/p>\n\n\n\n

So far, the U.S. economy has proven resilient in the face of dizzying policy changes <\/span>out of<\/span> D.C.<\/span> I don\u2019t know how stocks and real estate will perform over the next few years. But I gave up trying to predict the future years ago. <\/span><\/p>\n\n\n\n

Today, I practice <\/span>dollar-cost averaging with my real estate<\/span><\/a> and stock investments. <\/span>Every week, my <\/span>roboadvisor pulls money out of<\/span> my bank account to invest <\/span>automatically for me<\/span>.<\/span> Every month, I invest $5,000 in a new passive real estate investment through the co-investing club. <\/span><\/p>\n\n\n\n

The stock market rises, <\/span>the stock market<\/span> falls. <\/span>I can worry about my stock <\/span>portfolio\u2019s gyrations<\/span> as I <\/span>get closer to<\/span> retirement, but for now, I <\/span>keep enjoying<\/span> passive income from private notes, real estate syndications, and funds.<\/span><\/p>\n\n\n","protected":false},"excerpt":{"rendered":"

By historical metrics, the U.S. stock market is overvalued\u2014to put it mildly. The S&P 500 has a price\/earnings (P\/E) ratio of 28.75 at the time of this writing, compared to […]<\/p>\n","protected":false},"author":158586,"featured_media":183750,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":true,"footnotes":""},"categories":[8],"tags":[],"class_list":["post-183748","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-real-estate-trends"],"acf":[],"comment_count":0,"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/183748","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/158586"}],"replies":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/comments?post=183748"}],"version-history":[{"count":0,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/posts\/183748\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/183750"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=183748"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=183748"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/tags?post=183748"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}