I really can’t blame you for asking the question which forms the title of this blog post.
A lot of people are under the impression that due to recent stock market performance, there’s really no good reason to invest in stocks. In their minds, this is a foregone conclusion. After all, the stock market is on fire recently.
I don’t know if you’ve been hiding under a rock, but if you look at the Dow Jones Industrial Average one year before the election of Donald Trump and one year after his election, it’s like day and night. We’re talking about a 25% growth.
This is phenomenal!
In fact, the stock market has gone through some corrections, but it’s still riding high. Given this situation, it’s quite forgivable for people to think that the only direction the stock market can go is up.
Well, unfortunately, a lot of these people have short memories. Sure, it grew by 25% in recent years, but when you extend the timeline back firing off or all the way to the beginning, you will see that there are distinctive patterns where the stock market would shoot up like a rocket or creep up in a nice steady pace and then all of a sudden drop like a rock.
There are also parts in its long history where it just stagnated. We’re talking about trading sideways painfully for a long period of time. It has its fair share of severe drops and slumps, and to think that we can just compress all that performance within the past ten years would really be foolish because there are other dynamics involved.
The stock market, believe it or not , is not the economy, and I’m sure a lot of people assume that’s the case. They definitely trade that way, but that’s not the case. If you look at other investment vehicles that may produce a better return with less uncertainty, real estate is looking really good.
Now, before we jump in to the distinctive advantages of real estate, let me be clear: real estate is no angel either. If you’re looking for a completely risk-free type of investment, do not look at real estate. There, I said it! I know that’s kind of heretical to the ears of many people, but it’s absolutely true. If you need proof of this, you don’t need to look far. In 2008, thanks to the great financial crash, home prices and commercial real estate prices in the United States dropped like a rock.
Some areas got hit worse than others, but there is no denying that the longstanding reputation of real estate as somehow “immune” to economic downturns was not true. In fact, people were buying houses on credit in places like Las Vegas for $200, $300 or even $400,000 only to sell them short or let them go at fire-sale prices for as little as $50,000. Crazy! Las Vegas was not an outlier. It was not some sort of remote example that doesn’t reflect what was going on in the rest of the country.
Depending on the market you’re in, the drops were downright scary. In the more speculative parts of Los Angeles, for example, home prices cratered by 50%. Imagined that, 50%! In fact, too many people found themselves in the ridiculous situation where their mortgages and their interests were worth more than the house they were paying for.
In that particular situation, people felt that they had no other option but to just bail out. That’s right! They sold their property and got out of the loan because they were underwater. This happened throughout the country. Whether we’re talking about Arizona, Colorado, New York, San Francisco, Hawaii, it was a complete and total mess.
I raise this historical fact because, for the longest time, mortgages were viewed as done deals. Seriously. If you were looking for a slam dunk, the conventional wisdom was that mortgages were solid as a rock. If you are looking for an investment and you’re looking for a solid return, get into mortgages and do it quickly. After all, there’s a house behind it. It’s backed up by real wealth.
Well, as you can well imagine that thinking blew up in 2008. Now, fast forward to today, and it’s a completely different picture. Home prices have staged a massive comeback. Places that got hit really bad like Los Angeles and San Francisco were actually some of the most expensive markets in America. Indeed, there are apartments being sold in New York that are in the nine-figure range. The pendulum has basically swung to the other extreme direction.
With this as a background, the only conclusion that we can come up with is that real estate can be superior to stocks. Pay attention. It can be. It all depends on the following factors:
The type of property you’re buying. Remember you can buy group residential, multiple housing units or commercial property. You can also buy industrial property.
It also depends on location. This is actually the most important factor. As the old saying goes, success in real estate boils down to location, location, location. Make no mistake about it if you bought a place in Iowa, it’s not going to appreciate as crazy as if you had bought a place in Silicon Valley or San Francisco or certain parts of Manhattan in New York City or Los Angeles.
Also, you have to pay attention to regional stability. There are certain parts of the United States that are under a tremendous amount of economic and demographic pressure. There are some parts of the United States where people are just simply leaving in droves for whatever reason, maybe it’s government policy, maybe it’s changing demographics, maybe it’s just the absence or insufficiency of economic opportunities, people are just voting with their feet. They are just moving from point A to point B. So, pay attention to growth trends and market stability.
Another factor to keep in mind is that real estate can protect you from economic cycles. Seriously. Even the crash of 2008 provides some important lessons regarding protection provided by real estate.
While it was basically a bloodbath across the board, some areas got hit really, really bad and have yet to recover. Other areas got hit bad but they bounced back very quickly. If you need an example of a place that got hit really bad and stayed down, you don’t have to look far. Just look at Detroit.
The bottom line is real estate can be superior to stocks depending on the factors above, and the main benefit that you get is that you can achieve a tremendous amount of protection from market cycles.
During the downturn, if you had bought in San Francisco during the bottom of the market, or in Palo Alto, CA or the West Side of Los Angeles, you probably would be sitting pretty right now. Either you’re collecting a tremendous amount of rent, or you are ready to flip your properties for millions of dollars in appreciated gain.
Real estate can be superior to stocks, but you have to pay attention to what you’re doing. You also have to have money to invest in real estate. This is no joke. I mean, the borrowing rules have changed after the 2008 crash. You need to pony up a lot more cash in your down payment for you to lock in on a nice piece of reality.
Stocks can be Superior to Real Estate
There are situations where stocks can be superior to real estate. If you’re just trading the index, you’re doing well right now because there is no getting around that 25% increase. However, if you have a long-term perspective, if you’re just training the index, you might be trading neck and neck with real estate assuming that you bought some premium piece of real estate.
For stocks to truly be superior to real estate, focus on the overall rate of appreciation. In particular, look into buying fast-recovery stocks. These are stocks that are known to bounce back up very quickly after an economic downturn.
It also helps if you know how to trade the market going up and going down. In other words, you don’t have to exit the market to lock in your profits. You just trade going up and then sell short and make money as the market goes down and back up again.
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