Real estate and the stock market are two of the most popular and high-yielding investment options. As such, they both have become a household name for experienced as well as novice investors. Naturally, this widespread popularity of the two investment channels has been a cause of rivalry. On several occasions, they have been pitted against one another to determine which of the two is superior.
Reports suggest that the net value of housing in the US has doubled in the last decade and now has a net worth of $43.4 trillion. On the other hand, the US stock market’s net capitalization value is $48.2 trillion. While the higher market cap of the stock market may make it seem that stocks are a better investment than real estate, the higher volatility in stocks gives the real estate industry an edge over the stock market, making it a much safer investment.
Additionally, thanks to the real estate agents in Springfield, VA, investing in real estate is safer and more accessible than ever before, making the American housing market the best way to start building your wealth. This article will explain what volatility in stocks and real estate means and why real estate is better than stock in this regard.
What Does Volatility in Stocks and Real Estate Mean?
The volatility of any asset, be it stocks or real estate, has the exact definition. Volatility is essentially a measure of the fluctuations in the price of the asset over time. Knowing this, we can say that volatility in stocks and real estate means how frequently the price of a company’s stocks or a property changes over a period of time.
The volatility of an asset can be determined by calculating the standard deviation of the returns generated by the asset over a period of time. Obviously, volatility can only be calculated based on historical data. Knowing the volatility of an asset helps experts make predictions and approximations regarding future trends and value of an asset.
Generally, the more volatile the asset, the greater the risk of you losing your investment. That is why real estate is considered to be a safer investment than stocks since it offers lower volatility.
What Drives the Volatility in Stocks and Real Estate?
There are a variety of factors that influence the volatility of an asset, stocks, or real estate. The most prominent ones are political and economic factors. For instance, new subsidies or tax credits introduced by the government on the purchase of real estate can drive up the value of the market and boost the real estate industry.
On the contrary, events such as the COVID pandemic that damaged the US economy resulted in a lower demand for properties resulting in a downfall of the real estate market value.
There are also influential factors that are unique to each type of asset; for example, the value of stocks also largely depends on the performance of the company they belong to. A data breach or product recall could, for example, cause the price of a company’s stocks to dip. On the other hand, a strong earning report or a new product release that has been well-received by the public can drive the value of stocks up.
4 Reasons Why Real Estate Is Less Volatile than the Stock Market
You Are in Charge
Investing in stocks means that you basically own some of many shares of multiple companies. On the contrary, real estate offers you a tangible asset that you have complete control and authority over. But how does this translate to volatility, you wonder?
Well, the difference between owning these two assets is that with stocks, you do not have any influence over their value. Instead, the value of the stocks is entirely in the hands of the company they belong to. The better the company performs, socially and financially, the higher the stocks go in value and vice versa. However, if the stocks take a dip in value, there is nothing you can do to counter it. The only thing you can do is to sell the stocks and recoup as much of your investment as you can.
On the other side of the spectrum, real estate offers you complete control over your asset, which means that you have the authority to take measures that could uplift your property’s value.
As a result, even if the real estate marketplace were to see a downfall, you could offset the loss by remodeling your property, installing a solar system, or any other measure that would appreciate the value of your property.
Furthermore, real estate offers numerous financing options that minimize the risk of you investing your own money. For instance, you can borrow a loan from a lender to finance a real estate property and upsell it for profit after making repairs.
Real Estate Is a Low-Risk Investment Compared to Stocks
Investing in real estate offers the flexibility of diversifying your investment portfolio and mitigating the risk of losing the value of your investment. This can be done by investing in uncorrelated properties so that the underperformance of one of your assets does not impact the others. This makes your investment more solid and helps you absorb possible losses in case one of your properties were to dip in value.
Some possible properties you could invest in to diversify and strengthen your portfolio include rental properties, single or multi-family homes, and commercial properties such as office spaces.
Though they may seem disadvantageous, the greater transaction costs, a lack of publicly available information, high levels of inefficiency, and illiquid assets are the main reasons behind the real estate market’s lower correlation and volatility since it improves the immunity of real estate against external factors.
Natural Hedge Against Inflation
Every investment class tends to experience a variation in value as a result of inflation. However, real estate can sometimes be an exception. Hard assets such as office spaces or residential homes hold intrinsic worth since they are limited in number. This allows real estate to retain its value even after a wave of inflation, making real estate a natural hedge against the phenomenon.
Since real estate, like most other hard assets, can retain their value or increase above the inflation rate, it can resist the effects of inflation more effectively than the stock market.
Similar to how it is with land, real estate assets tend to appreciate in value as they become scarce and the demand for them goes up. This increment in value caused by the scarcity of real estate can lead to higher rental income as well as greater capital gains thanks to the increased demand.
In addition to this, abrupt and frequent price fluctuations are less likely to occur in real estate; the same, however, cannot be said for the stock market.
Above-Market Returns
Another reason why real estate is better than stocks when it comes to volatility is the flexibility to negotiate. When purchasing or selling real estate assets, the seller and buyer have the flexibility to negotiate on the price of the asset. Considering how real estate involves lower trading volume and how the information regarding any particular asset will not be equally accessible for everyone, a good seller can use this to their advantage and upsell their property.
Real estate agents in Springfield, VA, are pretty good at negotiations, which is why you should hire one when buying or selling a property.
On the other hand, no matter how much experience or knowledge you have, you cannot sell your stocks for an above-market return. Instead, you are obliged to deal in stocks, buying or selling, at whatever price the market sells for them.
Michael Gailliot Homes –Real Estate Agents in Alexandria, VA You Can Count On!
The stock market was, is, and will continue to be extremely volatile; unfortunately, there is nothing a stockholder can do about the volatility in stocks. However, the real estate market stands to be a solid marketplace offering investors less volatile and high-return investment options.
Are you thinking about investing in real estate? Why not let the best real estate agents in Alexandria, VA, guide you? Michael Gailliot Homes offers the finest and most dependable realtor services in town. Our team of real estate agents in Alexandria, VA, has over 20 years of experience and is up-to-date with all the latest real estate trends. So, let us be your guide in this ever-evolving American real estate market. Call us now, and let’s find the home of your dreams together!
