How did real estate fare versus stocks, gold, and corporate bonds during the past few years?
by Zain Jaffer
At some point, many of us have asked ourselves, what is the best place to put our money in? There are many asset classes, and these all perform differently at different times. That question is extremely difficult to answer because it depends on the time, the place, what our needs are, and when we need it. For example, if Silicon Valley Bank (SVB) simply held their older pre-Fed hike ten year treasuries to full maturity, they would still get the full amount of the bond. However since they needed to sell pre-maturity to get cash for their client withdrawals, they were caught in a bad place.
Nevertheless, the US Federal Reserve Economic Data (FRED) has some interesting data over a nine year period that compared the results of putting money in real estate, stocks (S&P500), and corporate bonds. The comparison was done on the indexes, thus averaging out the performance of each sector. All the data is adjusted for inflation and are real returns. The scores were normalized to 1.0 during the start of the pandemic, but the data extends to both the years prior and years after.
Again situations can change and people have different needs. But the US FRED data shows that real estate holds up its value quite well compared to these other asset classes in the long term.
Unfortunately though when the Fed started raising interest rates, banks correspondingly had to raise their home mortgage rates to the point where many people balked at the idea of signing up. That has affected new home sales and construction significantly.
So if you still have low monthly home mortgage rates consider yourself lucky and stick with it. The rates these days are simply too high for a lot of people who want to buy a new home.
S&P/CASE SCHILLER HOME PRICES
1.222 (OCT 2022) - 0.832 (JUL 2013)
ICE BofA CORPORATE BONDS INDEX
0.766 (OCT 2022) - 0.814 (JUL 2013)
S&P 500 INDEX
1.018 (OCT 2022) - 0.582 (JUL 2013)
The impact of the CARES Act liquidity infusion was clear from March 2020 to November 2021 on equities, after it had crashed. Many people, at that time working from home or with nothing to do, suddenly received cash from the government. A lot of these funds went into the stock market which sent it into a bull market. Remember the Reddit group Wall Street Bets and how they drove up the price of AMC and Game Stop? The reason they were able to go up against large hedge funds was because there was so much excess liquidity in the economy, and they were able to coordinate their trades efficiently.
Stocks expectedly did not perform well during the early stages of the pandemic since most businesses suddenly shut down. But stocks (and crypto) skyrocketed when the cash grants to citizens went into effect. At its peak at the end of 2021, the real cumulative return on the S&P 500 index was around 36%. But Fed interest hikes that started in March 2022 took the wind out of the stock market’s sails moving forward, even until now (subject to occasional small rallies), until quantitative easing and more liquidity enters the market.
November 2020 was pivotal in that it sent corporate bonds in a downward trend. Moving forward the current 2023 forecasts for a recession also does not bode well for returns on corporate bonds. Corporate bonds performed poorly because of the depressed business outlook at that time. Cash released to the public also went instead to stocks and crypto, not to bonds.
When the Fed started to raise rates, a phenomenon called Yield Curve Inversion started to happen. This meant that the yields of short term treasuries began to be higher than long term ones. People now prefer to just hold cash short term in these shorter term treasuries as opposed to tying their capital up in longer term ones.
Also newer current bonds (like the ten year) yielded more than similar duration bonds (older ten year) bought during the low interest rate regime. Unfortunately this is what happened to Silicon Valley Bank (SVB). Their money was tied up in long term government securities that few wanted to buy when they needed the money for withdrawing customers, and they had to declare a $1.8bn mark to market accounting loss. Their older ten year bond yields per annum were only at 1.79% versus the current 3.9%.
November 2021 was the time that both stocks and bonds started to go down in a correlated manner because of the higher bond yields.
Housing had always been gaining in price for several years, but particularly gained speed when construction took a halt during the peak months of the pandemic. Thus demand far outstripped supply, and the demand included those who wanted to move away from tight urban populated areas to less dense suburbs in order to avoid infections. Home equity increasingly became the major source of wealth for many.
Home prices rose steadily until May 2022, peaking at around 28%, but has fallen due in large part to the inability of many people to sign up for mortgages due to the increased interest rates imposed by the Fed starting March 2022. By that time, construction had restarted and had eased the tight housing situation during the pandemic.
Gold performs well when there is a loss of public banking confidence. However most of the buyers at the moment are from an older, more affluent wealthy silver and pepper grey haired crowd. Gen Z and younger people generally do not consider gold as an investment option except for jewelry. In addition, when the price of gold rises, miners ramp up production to meet demand. Industry needs gold as well, hence it is not in its interest to see its price rise too much. Gold has not had much luck rising above $2,000 per ounce on the spot price and just barely touches it. There is no telling though if it can rise above that ceiling in a sustained manner in the next few months or years, again tempered by an increase in mining.
It is important to note that people’s experiences with returns will vary with different macro conditions, their location, their particular needs and their requirements. However, this insight shows multiyear trends and is still valuable as a case study on how owning your home gives you relative safety and stability compared to other asset classes.