Stocks and real estate are the two favorite asset classes for almost every kind of investor. Yet these two investments are unalike, and people who invest in them do so for different reasons. Ideally, having real estate and stocks as part of your diversified investment portfolio would be best. The reason is to help you spread the risks of your investment.
Regarding risks, Upkeep Media explains real estate is less risky than stocks because it is less volatile. Volatility refers to how quickly an asset’s price rises and falls within a given period and by how much. It is an essential measure for assessing the relative stability of the investment and its vulnerability to economic shocks.
A highly volatile asset is riskier. The asset’s sensitivity to market conditions makes it hard to predict if its value will rise or fall. On one hand, volatile assets let investors make more money in the short run if the asset’s value increases. On the other hand, an investor can lose millions of dollars if the asset’s price unexpectedly falls.
On the whole, real estate is a less volatile asset than stocks. The price of real estate moves slowly and in a more predictable manner. That is different from what can happen to the value of a company’s shares. Share prices can rise sharply or fall very quickly in response to political and economic news. But real estate prices may not even react to the same news.
The reason for the relative stability of real estate, compared to stocks, is explained below:
Why real estate is less volatile than stocks
1. Real estate is a tangible asset
Unlike stocks, which are paper assets, real estate is a physical asset. When you buy a stock, you get a piece of paper or a digital confirmation of your ownership. This paper does not represent a tangible property that you can take physical possession of. That is why stocks are also called paper assets. Real estate is not like that; whether you are investing in raw land or properties, real estate is physical. The fact that the physical asset remains in place regardless of what happens to its price makes real estate more resistant to market shocks.
2. Liquidity and trade volumes
As a rule, liquid assets are more volatile. The liquidity of an asset refers to how quickly you can convert it to cash. Liquid assets are easy to trade. That makes them highly susceptible to demand and supply forces. If there is high demand for the asset, its price will rise. The opposite effect is seen when demand falls. Movements in the value of stocks are often a response to demand and supply rather than actual changes in the real economy. Because real estate is highly illiquid, fewer real estate transactions happen in a given period versus the number of stock market transactions occurring that same period. Consequently, real estate prices move more slowly.
3. Real estate is based on actual needs and is always in short supply
Demand for real estate is based on essential needs that derive from the utility value of real estate. Real estate will always be relevant because people need land, homes, office buildings, and factories. Every kind of real estate investment is based on land that cannot be manufactured (at least not yet). While the human population is growing very fast, the size of land available on earth is fixed. That means there is more demand for land than there is supply of land. This dynamic ensures that land is always valuable and the value of real estate will always be relatively stable.
4. Longer hold periods increase real estate stability
Most people who buy real estate plan to keep it for a long time. Some investors do not plan to sell their property. Unlike the stock market, where most trading is speculative and short-term. More extended hold periods for real estate means that investors are more likely to hold onto their properties during times of economic downturn instead of selling them off. As a result, real estate prices are more resilient than stock values. Even when property prices fall and rise in the short term, they remain relatively stable in the long term.
5. Real estate is local
Real estate investments are often insulated from events in the national and global economic spaces. They are more responsive to local events than to global ones. That allows some property markets to continue to thrive, irrespective of what is happening in other geographies. The local drivers of real estate value are usually things like school districts and neighborhood amenities. These things are more responsive to local demand than to national economic news. That is, the interests and activities of the people in a locality have more impact on real estate values.
How should this information influence your investment decisions in the future? For guidance on taking advantage of real estate’s relative stability to build a bulletproof investment strategy, talk to us at…
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FAQs
Because real estate is highly illiquid, fewer real estate transactions happen in a given period versus the number of stock market transactions occurring that same period. Consequently, real estate prices move more slowly.
Is real estate less volatile than stocks? ›
Is real estate less volatile than the stock market? Generally, yes. It depends on the particular stock and real estate investment (there are numerous ways to invest in real estate and they're not all equally risky), but real estate is typically less volatile than the stock market.
What is the volatility of real estate? ›
Volatility, on the other hand, refers to the degree of fluctuation or variability in the value of an investment over time. In the context of real estate investments, volatility can be influenced by factors such as changes in market demand, shifts in economic conditions, or changes in interest rates.
Why is real estate better than stocks? ›
While home prices rise and fall, they generally don't experience the wide short-term fluctuations often seen in the stock market. Unless you're flipping properties, most real estate investing has longer time horizons which can help minimize short-term volatility.
What is riskier real estate or stocks? ›
Stock prices are much more volatile than real estate. The prices of stocks can move up and down much faster than real estate prices. That volatility can be stomach-churning unless you take a long view on the stocks and funds you purchase for your portfolio, meaning you plan to buy and hold despite volatility.
What does it mean to be less volatile than the market? ›
If the stock price moves higher or lower more slowly, or stays relatively stable, it is said to have low volatility. Historic volatility is calculated using a series of past market prices, while implied volatility looks at expected future volatility, using the market price of a market-traded derivative like an option.
Why is real estate stable? ›
Los Angeles has a relatively stable real estate market with a history of consistent, long-term appreciation in property values. This stability is driven by factors such as the city's status as an economic hub, its thriving job market, and the limited supply of land for new construction.
Why is volatility bad for investors? ›
A highly volatile security hits new highs and lows quickly, moves erratically, and has rapid increases and dramatic falls. Because people tend to experience the pain of loss more acutely than the joy of gain, a volatile stock that moves up as often as it does down may still seem like an unnecessarily risky proposition.
What is a good market volatility? ›
How Much Market Volatility Is Normal? Markets frequently encounter periods of heightened volatility. As an investor, you should plan on seeing volatility of about 15% from average returns during a given year. “About one in five years, you should expect the market to go down about 30%,” says Lineberger says.
Do you want high or low volatility? ›
Many day traders like high-volatility stocks since there are more opportunities for large swings to enter and exit over relatively short periods of time. Long-term buy-and-hold investors, however, often prefer low volatility where there are incremental, steady gains over time.
Real estate values do tend to rise over time but the market is unpredictable and your investment could depreciate. Supply and demand, the state of the economy, demographics, interest rates, government policies, and unforeseen events all play a role in real estate trends, including housing prices and rental rates.
What makes more millionaires stocks or real estate? ›
It's harder to get rich off stocks than it is to get rich off real estate. The main reason why is due to the absolute amount of money you need to risk to get rich in stocks. Even if your $5,000 stock investment goes up 50%, that's only $2,500.
Is it better to build wealth in real estate or stocks? ›
Stock investing may be a more effective approach for those wanting higher returns over a shorter period. Real estate may be ideal for those who want a stable flow of income and can wait to see a return on their investment.
Is it a bad time to invest in real estate? ›
Many potential homebuyers are holding off on purchasing their next property because of two little words: interest rates. From a short-term perspective, this makes sense: Mortgage rates reached their two-decade high in 2023, with a high-average of 8.45%. However, from a long-term view, rates aren't that bad.
What is the average ROI for real estate? ›
According to the S&P 500 Index, the average annual return on investment for residential real estate in the United States is 10.6 percent, so anything above that can be considered better than average. Commercial real estate averages a slightly lower ROI of 9.5 percent, while REITs average a slightly higher 11.3 percent.
What is a major disadvantage of real estate as an investment? ›
Real estate investments tend to have high transactional costs, especially in legal and brokerage fees. The process of acquiring a new property is also very long and tedious with lots of legal formalities. Another disadvantage of property investments is that they are not easy to liquidate.
Which market is more volatile? ›
Commodities are typically more volatile than currency and equity markets due to the lower levels of liquidity or trading volume than other asset classes, as well as the constant exposure to weather events and other production issues that might affect supply and demand.
Is real estate less risky? ›
Real estate is generally considered a moderate to high-risk industry. While it offers the potential for returns, factors such as market dynamics, economic conditions, and changes in supply and demand can affect rental income and property values.
Stocks and real estate are the two favorite asset classes for almost every kind of investor. Yet these two investments are unalike, and people who invest in them do so for different reasons. Ideally, having real estate and stocks as part of your diversified investment portfolio would be best. The reason is to help you spread the risks of your investment.
