Why Real Estate Is Less Volatile than the Stock Market

By Michelle Clardie on 02/08/2023.
Reviewed by Dan Gatsby .
In our review of real estate vs stock market investments, we compared the pros and cons of both investment types. But in this article, we want to focus on one important factor in deciding between real estate and stocks: volatility.

Volatility is the degree to which asset prices rise and fall over a period of time. The more the value can change, the more uncertainty is inherent in the investment. Generally, investors prefer investments with lower volatility because they can more accurately project returns on more stable investments.

Is Real Estate Volatile?  

Volatility is relative. While all investments carry a level of volatility, real estate is generally considered to be less volatile than other asset classes, like stocks. 

Here are seven reasons why real estate wins the real-estate-volatility-vs-stock-market-volatility comparison.    

1. Tangible Asset Ownership

When you buy a stock, you do not receive ownership over any physical asset. You simply have a piece of paper (or, in today’s market, more likely a digital confirmation) that you own a specified number of shares in a company. It is possible for general market conditions, or poor company management decisions, to cause the value of the stock to drop to zero. In this case, you’re left with nothing of value to help offset your losses.  

But with real estate, you have a physical property securing your investment. Even if the structure were to be destroyed, the land itself will always retain value as a scarce resource. Ownership over this tangible asset is one of the reasons real estate is low risk and has lower volatility than stocks. 

2. Longer Hold Periods Increase Stability

The stock market is easily swayed by shifts in public opinion because shares can be bought and sold in just seconds. The moment economic uncertainty increases, a certain percentage of investors will “panic sell” their shares, flooding the market with shares, and causing the stock price per share to decrease. 

But real estate transactions require a longer lead time, which helps insulate the industry from short-term events. In a traditional real estate transaction, it can take a few weeks to find a qualified buyer plus as much as 30-60 days for the buyer to complete their due diligence and close on the property. Real estate is not bought and sold on a whim as stocks can be. And these longer-term holds mean that real estate prices fluctuate more slowly than stock prices. 

3. Steady Cash Flows

Stocks can provide cash flows in the form of dividends; many corporations issue quarterly dividends to investors based on revenue. But dividend cash flow is not always predictable. If a company has a poor quarter, there might not be any money available for dividends for that period. 

Real estate investors, on the other hand, typically enjoy predictable passive income from real estate. Many residential rental contracts cover periods of 12 months or more. And commercial rental contracts can easily reach 10 years or longer. These contractually guaranteed cash flows add to the overall stability of real estate investing. 

4. Real Estate is Local

While stocks are susceptible to national and global economic trends, real estate investments have a level of protection afforded by locality. Certain markets can thrive despite widespread economic changes. Local market drivers like employment prospects, school districts, and neighborhood amenities often have a greater impact on property values than national market conditions. 

As long as locals place a premium on certain neighborhoods, those neighborhoods can retain their values, even if the national real estate market is struggling. For example, in some of the best cities to invest in real estate, home values grew by over 20% year-over-year from 2021 to 2022 while much of the national housing market was in the single digits.  

5. Hedge Against Inflation

In our study of what happens to real estate during inflation, we demonstrated how rental rates and property values rise, effectively creating a hedge against inflation. 

It is also likely for the value of stocks to increase with inflation. However, these gains can quickly be erased when efforts are made to slow the rate of inflation. For example, in September 2022, when the Fed announced a fourth consecutive interest rate increase of three-quarters of a percent, the S&P 500 immediately lost value, as did the Dow Jones Industrial Average.

The national housing market, on the other hand, saw values stabilize, but not fall from the year-over-year increases.  

6. Tax Benefits

The primary tax benefit of stock market investments comes, not from the stocks, but from holding the stocks in a tax-advantaged account (like a government-approved retirement account or a 529 account for education). 

While real estate can also be held in tax-advantaged accounts, there are also intrinsic tax benefits of real estate investing. The tax savings from real estate investments contribute to the appeal of real estate holdings, which helps reduce the volatility of real estate as an asset.  

7. Above-Market Return Potential

Common stocks are fungible, meaning that one stock in a given company or fund is worth the exact same as any other stock in that company or fund at a given point in time. Take a share of a REIT, for example. A REIT is a company that invests in income-producing real estate and distributes a share of the proceeds to investors in the form of dividends. Because each REIT invests in a whole portfolio of properties, the investment is automatically indexed to the market. As an investor, there is nothing you can do to help your REIT outearn the market. 

Real estate, on the other hand, is non-fungible; each property is unique. Even in a condo complex full of units with the same layout, each unit occupies a unique piece of the world. The view from one unit, the amount of sunlight it gets, the cellphone reception, etc., makes each unit special. This gives real estate investors with specialized knowledge or strategies a chance to earn above-market returns.

Volatility and Correlation

Correlation is the degree to which the performance of one of the investments in your portfolio is related to the performance of another investment in your portfolio. For example, if you own shares in an S&P 500 Fund, and shares in a Dow Jones Fund, both funds will perform well if the stock market is generally up, and both will perform poorly if the stock market dips. 

Having a high correlation among your investments increases volatility by linking the success or failure of your entire portfolio to the performance of a single sector. 

Interestingly, the correlation of the stock market as a whole has increased in recent years with the popularity of index funds and the decline of individual stocks. Index funds passively track wide sectors of the market (like the S&P 500, for example). In 2010, around 6% of the stock market was owned by index funds. Today, in 2023, index funds own an estimated 20-30% of the market. This has increased the correlation of the entire market, which has increased its volatility. 

To protect your investment portfolio, it makes sense to diversify into asset classes with lower correlation. For example, if your retirement savings are invested in stocks and bonds, you may consider investing in real estate or any number of alternative investments to lower the volatility of your comprehensive investment portfolio.   

Avoid Stock Market Volatility by Investing in Real Estate with Gatsby Investment

Real estate syndication is among the best ways to diversify your investment portfolio and reduce the volatility of your holdings. Syndication uses funds from multiple investors to capitalize on unique real estate investment opportunities. Because funds are pooled, investors can buy into a high-yield real estate project with a low investment minimum. And, because of these low investment minimums, investors can spread their capital among multiple investments to further increase diversification and decrease volatility!

You could, for example, invest some of your funds into a single-family flip for quick returns while investing your remaining capital in multi-family rentals for long-term appreciation and cash flows. 

Whatever your investment goals may be, Gatsby Investment has options to help you meet them!

Explore your investment options and start building your low-volatility real estate portfolio today.

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