Real Estate versus Stocks: Which Was the Better Pandemic Investment?
Should you have invested in real estate or stocks during the pandemic period of 2020-2024? With Super Micro Computer Inc. pushing over 4,000 percent over the last five years, you would think stocks are the clear winner. However, this isn’t a conversation about speculation or gamification of stocks, outliers like Nvidia ($NVDA) or even landing some overlook real estate that spiked up 200 percent. Instead, this is a more grounded approach to how the average Joe could have leveraged his/her dollars to great effect.
For the most part, there is no distinct right answer here. However, there is a wrong answer. Standing still and spending money over the last 5 years, is the worst possible scenario. It’s the equivalent of losing twice. If you found yourself wondering what you spent your time and energy on for half a decade, it’s OK to reflect, own the moment, and then pivot toward better answers. You don’t lose by investing in quality assets and holding for the future.
To conduct this review, I will use the Median National Home Price and the general S&P 500 Indexed ETF Stock (Vanguard Total Stock Market, $VOO) market performance from April 2020 through April 2024.
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The Difference between Real Estate and Stock Purchasing
There is a myriad of ways to grow your wealth, however, the formula is simple. Assets minus liabilities. Contrary to popular belief, it’s not that easy.
To be fair, a lot of Americans are saddled with debt. The Pandemic ushered in financial moratoriums such as the Federal Student Loan Payment pause. While being stuck at home, median household savings peaked north of 30 percent. The drastic changes forced the Federal Reserve to cut interest rates to zero percent. All the while the stock market became flushed with new investors. If you were cash liquid and had a year’s worth of savings, you were in a great position to either buy the 40 percent dip or a home with lower-than-average interest.
In the end, both routes were and continue to be difficult to navigate.
Investing in stock is easier than buying a home. All you have to do is jump into a brokerage (i.e. Fidelity or Vanguard) and start investing. It’s even easier if you consider your employer-sponsored program (i.e. 401k or 403b) as investments.
Owning a home is a different bargain.
The risks seem elevated since there are way more costly oversights. Buying properties with the intent to rent them out or investing in REITs (real estate investment trusts) can also add a range of complexity. If the numbers are great, the cash-flowing opportunity from rentals feels more lucrative. However, settling on a bad tenant can easily cost you double.
In the end, you don’t have to choose between the two. Most Americans mix it up; this is likely the best approach since you are netting a solid foundation and investment trimmings. The goal is to make your money work for you. If you are trading too much time for too little, I’d consider that a bad investment.
Low-Interest Real Estate Was a Peak Pandemic Investment
In April 2020, the median listing price for a home in the United States was $317,100, according to Realtor.com, US Census and HUD. This was a 7.3 percent increase from the previous year (2019). The effective 30-year fixed mortgage rate was 3.37 percent. The 15-year fixed mortgage rate was hovering around 2.82 percent.
According to Realtor.com, the median US price of homes for sale in April 2024 was $430,000. The average interest rate for a 30-year fixed mortgage increased to 7.64 percent, and the average rate for a 15-year mortgage was 6.18 percent.
Let’s calculate two things. First up the price difference to determine the value growth. The new home price is $430,000 minus the old home price of $317,000, that’s a difference of +$113,000 (or +35.6 percent). We now need to divide by 5 to find the +7.13 percent annualized return.
Now to look over the Pandemic Investment Stock Performance
Since Empower provides a great example, we will use that to observe and record market performance. From April 1, 2020, through April 30, 2024, S&P500 investment performance for 1491 days +94.84 percent or + 18.968 percent annualized return.
That was simple enough. We can also confirm those dollars with Portfolio Visualizer’s Back Test. And, it’s accurate to a fault at 19.1 percent annualized return. Meaning, if you invest in the S&P 500 index ETF, your assets would have compounded annually at nearly 20%. Compared to the historical average, that’s great.
To compare this to the real estate position, we will have to do 7 percent. Note that on average first-time buyers usually pay around 6% of the home price, while repeat buyers pay down 17 percent. We are using the 7 percent to be more conservative. For this example, this means a $317,000 would have required a $22,190 deposit. If $22,190 was invested in VOO instead, you would have $45,336.
Wait did Investing just lose? $113,000 is bigger than $45,336.
Pandemic Investments: Real estate vs. stocks
First consideration, there are various metrics to figure out if investing in real estate or stocks will make you more money.
Attempting to answer can be simple but you need ground rules. In our example above, technically real estate won. Why? It’s likely because of the total value of the asset. In the end, real estate investors put up a smaller sum in a bigger asset. Yes, there is still the mortgage to consider, but in the end, the dollar value is greater. The question you must decide what type of real estate you’re comparing to which stocks.
Let’s say that instead, we were looking at a lump sum investment if a person had $317,000 to invest in stocks or real estate at the top of April 2020. The homeowner would have a net of $113,000 plus $2,500 per month (for housing) that would be invested for five years in VOO. The ending portfolio of $173,551 added to the home value of $430,000, equals $603,551.
In contrast, if a person invested the full amount of $317,000 upfront and rented (at a fixed rate of $2,500 per month). That’s a total of $647,656. The investor has the advantage. Yet again, you can see how it depends on how the equation is laid out.
Conclusion?
In my household, we do both.
We own to keep our housing cost stable and wealth growing with a large foundation and we also invest the difference in the market. The goal is to gain on both ends. Live in a place that makes you happy and causes you less stress. Invest so you can move toward your own financial goals. I would also hate watching rent prices go up each year. Those prices ballooned over 20 percent during the same testing period. I’m not built to move around too much.
There is no real solution versus the one you choose for yourself. Buy smart and try not to stand idle while inflation eats your labor and time.
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