They say that buying a home should be considered an investment, as it’s often the biggest financial commitment that an individual will make over the course of his or her lifetime. If you play your cards right and put in the necessary work, the return on investment can be significant down the road when you’re looking to sell. As you know, some people have made “flipping” houses part of their regular income – and if you do it right, it works.
While buying a home is often considered to be an investment, one of the key ways people have built wealth is by investing in the stock market. But have you ever wondered what yielded the better return over the years? The stock market or the real estate market?
Business Insider did, and it recently studied the two markets over the course of the past several decades to see what avenue was the better investment option. To do this, it used data from Yahoo Financial and the Federal Housing Finance Agency (FHFA). Though home buying and investing in stocks are two very different things, the results of the study may surprise you.
The Better Investment Option: Stocks or Real Estate?
So what’s the better investment option? The clear winner was stocks, which saw about a 700 percent increase from the Business Insider study, which surveyed from 1991 until now. That’s significant, especially when you consider the great recession in the late 2000s. However, we’re currently riding a nine-year bull market, which is certainly playing a big role in the increased value of many stocks.
This isn’t to say that the housing market hasn’t presented growth as well. The study found that housing prices have risen by about 164 percent throughout the course of the study.
One of the big growth factors for stocks: the tech bubble. When the tech bubble busted in the early 2000s, the stock market took off. In fact, since 2002, stocks have increased by more than 230 percent. Another big factor in stock return on investment is they take less time to recover from market fluctuations. When the FHFA bottomed out, it took a long time for the housing market to recover. In fact, the FHFA index didn’t fully recover until 2016 – nearly 10 years after the fact. Stocks hit their low in 2009, yet they’ve been up nearly 240 percent ever since. Housing prices are up only about 35 percent within the same time span.
Going by this study, it appears that stocks are the clear winner when it comes to return on investment, but there are other factors to consider.
Considerations
Obviously, stocks don’t serve as much of a practical purpose as a home does. A home provides people a place to live and a community to be a part of. Some might say this makes homeownership a more practical investment than stocks, even if the return on investment may not be as much.
While both homeownership and stocks come with certain risks, people who invest in stocks can lose their wealth almost as quickly as they gain it. That’s because the market tends to be much more volatile, and ebbs and flows are a normalcy.
A third consideration to factor into account is the fact that past trends don’t predict the future. So while the Business Insider study is great for showing how both the housing market and stock market have grown, the past 30 years certainly may not be indicative of the next 30.
If anything, this study should go to show the importance of not putting all of your eggs in one basket – because that’s how you can get easily burned. It’s always best to diversify wealth, so that when one aspect of your investment portfolio takes a hit, you have plenty more to fall back on until it rebounds.
So, don’t be shy about buying stock or buying homes, perhaps it’s best if you do both for a well-rounded investment portfolio.
Regards,
Ethan Warrick
Editor
Wealth Authority
