Why is real estate investing more stable than the stock market?

Post by 
Christopher Ostertag

If you’ve spent some time reading up on investing strategies and asset classes, chances are you’ve come across the term ‘volatility.’ For most people, it’s not a friendly concept. 

But if investors ask, “Which asset classes are the least volatile?” real estate is likely to be near the top of most people’s lists.

What is volatility?

Volatility is the amount of change in an asset’s price over a given period of time. Assets that frequently undergo large price fluctuations (i.e. high peaks and low troughs) are more volatile. Assets whose prices move more incrementally are less volatile.

Why is volatility a problem?

Volatility is a form of risk. 

A more-volatile asset is riskier than a less-volatile one. If an asset is volatile, it can be difficult to tell whether it’s going to go up or down in the period shortly after you buy in. If you bought a stock or crypto at $100, but yesterday morning its price was $20 and yesterday evening its price was $300, it’s just more difficult to predict where it’s headed next. 

Because the price could potentially drop very quickly (or rise very quickly and plummet immediately afterwards)  making money off of volatile investments often requires careful timing. If you buy at $20 and sell at $100, you’ll be pretty happy — but if the asset is especially volatile, the difference between profit and loss might be measured in hours, or even minutes.

For day traders and speculative investors, who have large portfolios and high risk tolerance, this can be an acceptable strategy. 

People who want to build long-term wealth should invest in assets that produce a slower but more predictable up-and-to-the-right pattern of return..

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.

There’s two main reasons why.

I: Market Forces

To explain this one, let’s take a step back and think about price. When you sign into your brokerage account (let’s be honest, your brokerage app) and browse some stock prices, you see two things. First, you see the price you are likely to get if you buy (or sell) at this very instant. But you’re also seeing the average price of the other transactions occurring right now. The price you see is an offer created based on the aggregate of a bunch of inputs: one input for every time the asset is bought/sold.

That means price isn’t exactly the direct consequence of market forces - it’s also impacted by consumer behavior. And, consumer behavior creates supply and demand. Typically, prices move something like this:

Favorable event occurs → demand rises → prices inflate

Unfavorable event occurs → demand falls → prices deflate

Some type of event happens and causes investors to demand either more or less of the stock in question. When they do, the price rises or falls.

But, the actual price of an asset is true of only a single transaction. When you see the price on a stock ticker, chances are you’re looking at some kind of average of every transaction that occurs. Because buyers want to get a good deal, and sellers don’t want to lose money, any given transaction will likely deviate from the mean by only a fraction of a percent at most.

So . . . how do prices change so quickly?

Unless something pretty unusual is going on, rapid price changes occur when there’s a large volume of transactions occurring over a short period of time. Each one might move the price by only a little, but hundreds or even thousands of relatively incremental transactions can have a huge collective impact on prices. This means that the number of players in a given market has an indirect, but important correlation with volatility:

More people → more transactions → prices move faster in real time.

Investors can receive push notifications on their brokerage apps when prices move even a small amount, and a flurry of rapid transactions can start building into a tidal wave. When this happens, one of two phenomena often follows: either a bull run or panic selling — both of which drive massive price moves.

One important takeaway from that effect is that liquidity and volatility tend to coincide. If it’s hard to sell an asset, fewer transactions will occur and prices will move more slowly. Stock markets, however, are massive nation- or world-wide clearinghouses designed for the express purpose of overcoming this problem by matching buyers with sellers and making sale easy. That’s great for investors who want higher liquidity, but it does heighten volatility (and therefore risk).

Real estate that isn’t bought and sold on an exchange simply doesn’t face this problem. It’ll be less liquid, but also less volatile. Real estate is harder to buy and sell because it’s a physical asset: it’s harder to sell your house than a stock. 

Ownership shares in a private REIT or PE fund are similarly difficult to sell because of early withdrawal penalties that protect investors by reducing liquidity to protect against rapid price fluctuations. Finally, real estate assets are generally less liquid than traditional equities simply because it’s a more specialized asset operating in a narrower market of buyers and sellers.

II: Asset-Level Features

Real estate as an asset class is also more stable than, say, crypto pretty much regardless of how you invest. Even an exchange-traded REIT is usually less volatile than most other exchange-traded assets.

Real estate’s fundamentals are well-optimized for low risk and strong returns over time. Real estate is an intrinsically lower-risk asset class. While real estate is less likely to take a trip to the moon,  it’s also less likely to find itself lying in a ditch.

Real estate is a tangible, physical asset that will always be relevant because everyone needs a place to live. It retains value over time, creates tax advantages, keeps climbing when inflation and recession hit, and doesn’t experience the short-term fads.

This effect is amplified when you’re working in a particular market. Where buying stocks can be fairly low-commitment, it takes serious capital and expertise to enter a new real estate market, which limits the number of buyers and gives an edge to sellers and established players — particularly niche players who know their specific market and strategy deeply. And, macro-level forces (like, for instance, nationwide recessions) are just less likely to implicate your investments if their profitability doesn’t depend on those macro-level forces. That’s especially true for a countercyclical asset like real estate.

Concluding Thoughts

It’s probably worthwhile to point out at the end that volatility can sometimes be a good thing. Sometimes. (Hey, it can make you rich overnight!)

But volatility giveth, and volatility taketh away.

Overnight crypto millionaires can lose it all the very next afternoon. For investors with longer time horizons and longer-term goals, too much volatility in a portfolio is a serious problem. And fortunately, adding real estate is a highly effective counterweight.

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