Which Investment Generates Higher Returns – Real Estate, or the Stock Market?

By Rachel Puryear

People work hard for their money, and want to see the fruits of their labor work hard for them, too. Realistically speaking, people are unlikely to earn their way to financial independence – unless one is a very high earner, is always extremely frugal, and wants to work quite late into life. To have a much better shot at financial independence, it is essential to not just earn, but to also invest money.

Two of the most popular investing options for people in the United States include home ownership, and the stock market. This begs the question – which path generates the most wealth over time? Let’s look at what Nobel Prize winner and Yale economist Robert Shiller had to say about it.

A pile of cash money, with U.S. dollar bills of varying amounts. By Blogging Guide.

According to Shiller, buying a house for investment purposes is a terribly overrated idea. In short, Shiller says that housing values don’t tend to appreciate faster than inflation, and that diversified stock market investments tend to generate a superior return over time.

Financial journalist Brian Stoffel, in an interview with Motley Fool; cited Shiller’s work, and gave an example. Stoffel referenced a homeowner who paid $42,000.00 for a home in 1972. The equivalent of that amount paid today, adjusted for inflation, is $266,178.00.

Today, that same home is worth $3 million. Certainly, not a bad gain, and one that greatly exceeds inflation. However, a person who had invested $42,000.00 into the S&P 500 in 1972, and reinvested the dividends every year, would have…get ready for this…$10 million today! A much larger return by comparison.

This insight is, of course, not in any way intended to discourage buying homes. Buying a home is about much more than investing. Having a place to live, having your own place and not being at the mercy of a landlord or the rental market, being part of a community, and giving your family a stable residence are non-monetary benefits of homeownership; and also worth a great deal.

Furthermore, in some housing markets – such as here in the San Francisco Bay Area – housing prices and market growth are much higher than in many other parts of the nation, and investment in housing should always be viewed in the context of the surrounding market.

At the same time, investing in stock markets offers a lot more diversification than investing in just one house, in just one market. The benefits of diversification are well established.

Additionally, regarding purchasing rental properties as investments; being a landlord in California is becoming increasingly costly and difficult. Many small California landlords are finding the real estate business an increasingly costly and risky one in the Golden State.

Accordingly, deciding how to invest is personal, and no two sets of circumstances are alike. Tendencies and absolutes are two different things. Investing at least some of one’s savings in a diversified stock market is generally a good idea. The decision to buy a home – in addition – could also be a good investment, if the personal intangible benefits tip in favor of doing so. However, that’s an individual decision to make.

Thank you, dear readers, for reading, following, and sharing. Here’s to investments and financial decisions that work best for your lifestyle and circumstances.

If there is something you would like to see addressed on this blog, please reach out to me here to ask. If you want to see more content like this and you don’t already subscribe, click here to get the Free Range Life and Work newsletter 2x a month!

Note: I am not a financial advisor. Nothing in this post is, or should be relied upon as, individual financial advice. This post is, instead, strictly opinion and commentary. If you need a financial advisor, you should seek an appropriately qualified professional.


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