Since 2011, Gallup surveys have consistently highlighted real estate as the top long-term investment, with its dominance becoming especially pronounced since 2013. Despite a temporary flirtation with gold, real estate has maintained its position as the preferred investment vehicle for Americans, far outpacing stocks in popularity.
This enduring preference for housing can be attributed to several factors, notably the deep-rooted American Dream of homeownership and the substantial financial commitment associated with purchasing a home. Real estate represents both the largest financial outlay and the most significant asset for many households. Interestingly, real estate’s appeal persisted even through the turbulent times following the 2008 housing crash. The market’s recovery was surprisingly swift given the severity of the downturn, which saw housing prices continue to fall well into 2012. This resilience is noteworthy considering the stock market bottomed in 2009 and exhibited a series of significant drawdowns in the years that followed.
The nature of real estate pricing contributes to its allure. Unlike the stock market, housing is an illiquid asset with less frequent price changes, which translates to lower volatility. Historical data from Robert Shiller’s housing price database reveals that, since 1950, the U.S. housing market has experienced only seven years of decline, amounting to a mere 9% of the time. In contrast, the stock market has faced negative returns 22% of the time and has undergone 32 double-digit drawdowns, including ten bear markets and six outright crashes. Even when housing prices do decline, the impact is less noticeable due to the illiquid nature of real estate. For investors, this can make housing appear more stable compared to the stock market’s fluctuations. However, this does not necessarily imply that housing is superior to other asset classes, such as stocks, bonds, gold, or cryptocurrencies.
The real estate market’s performance is highly contingent upon various factors including location, timing, and individual circumstances. Additionally, the true return on investment in real estate is often obscured by ancillary costs such as property taxes, insurance, maintenance, and transaction fees. While the housing market has delivered favourable returns for many over the past decade, it is crucial to approach it with caution and consider diversification. Investors need not limit themselves to a single asset class; instead, a diversified portfolio spanning housing, stocks, bonds, and other assets can mitigate risks and capitalise on various market opportunities.
