Housing vs The Stock Market

Partial transcription of The Indicator From Planet Money reprinted with permission
Originally aired March 28, 2019

STACEY VANEK SMITH: Our next question comes from listener Rachel and her husband.

RACHEL: We were hoping you could help us get to the bottom of a debate we’ve been having. Long term, is it better to invest in the stock market or in real estate properties? My husband’s dad is a wealth manager while my mom is a real estate agent, so we often get conflicting points of views. We’re at the point where we’re saving enough money to put into one of the two. We have a lot in both already but aren’t sure what to keep doing. Any clarity would be amazing…

VANEK SMITH: Real estate, or housing, versus the stock market – so this is a question that comes up all the time in finance.

CARDIFF GARCIA: Three economists have just released a new working paper about the long-term returns on different asset classes, things like stocks and housing. And they’ve been researching this topic for a while. What they did was to study the long-term returns on stocks and housing both around the world and in the United States going all the way back to the late 1800s.

VANEK SMITH: And what these economists found was that throughout the whole world, equities and housing returned just the same amount every year, a little less than 7 percent after adjusting for inflation.

GARCIA: But in the U.S., the story is a little different. U.S. equities over the long term have returned about 8 1/2 percent a year. Housing has returned about 6 percent. But here’s the thing. Throughout the years, equities have fluctuated. They’ve gone up and down more than housing has fluctuated. In other words, according to this paper, equities have been riskier. So, you get a higher return, but you’re taking more risk to get that return.

VANEK SMITH: If there is one takeaway from the report, the thing that economists themselves are the most surprised by, it’s that housing, as an investment, has historically been better than they had assumed. But that said, there are dozens of caveats that we would have to add to this conclusion.

GARCIA: For example, there is a difference between buying a house for you to live in versus buying a bunch of rental properties that you might have to manage yourself or maybe pay somebody else to manage. Plus, there are the transaction costs of buying and selling stocks versus those of buying and selling homes.

VANEK SMITH: But maybe the biggest caveat of all is that, you know, just because you get a certain return from an asset in the past does not mean you’re going to get that same return in the future. And of course, there are so many other caveats. So Rachel, if you or other listeners are interested in reading this paper, we will link to it on our website – that is npr.org/money – along with some other reading material on the topic.

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Related article: Òscar Jordà, Moritz Schularick and Alan M. Taylor, “The Total Risk Premium Puzzle,” National Bureau of Economic Research.