Which is a better investment: a home or stocks? The Federal Reserve Bank of New York put that question to a representative sample of adults recently, and it found a surprisingly strong preference for real estate as well as an equally surprising reason.

The setup

In the Fed survey, respondents were asked to imagine that they were advising a young couple that had just received a financial gift large enough to cover the down payment on a house. First, respondents were asked whether they think the couple should use the money to buy a primary residence or invest in the stock market. Next, they were told to imagine that the couple already owns a house that they live in. What advice would they give in that scenario? Should they invest the money in a rental property or the stock market?

In both cases, most respondents recommended real estate. In the first scenario (primary residence vs. stocks), it wasn’t even close. More than 90% said they’d encourage the couple to buy a house. In the second scenario (rental property vs. stocks), a majority still favored real estate, although not by as wide a margin (60% favored the rental property investment).

First scenario take-aways

With apologies to the Fed, I’m not crazy about the idea of pitting a primary residence purchase against a stock market investment. It’s an apples-to-oranges comparison. There are so many considerations that go into buying a home other than the potential for profit.

People don’t typically buy a house hoping it’ll appreciate enough to fund their retirement. They buy it for countless other reasons — because it’s close to good schools, near where they work, the right size for their family, etc. Of course, they hope it’ll go up in value, but that isn’t usually their primary motive, nor, in my opinion, should it be. (There are more details on the argument against thinking of a home as an investment in the March 2020 newsletter article, Is Your Home an Investment?)

Among those who said they would recommend housing over the stock market, 38% cited “higher housing returns” as their reason. While home prices have appreciated strongly during the pandemic, those gains have been outpaced by the market’s returns since bottoming out in March of 2020. And historically, Yale economist Rober Shiller (co-developer of the oft-cited Case-Shiller home price index) has said that home price appreciation in the U.S. between 1890 and 1990 was “just about zero after inflation.” That’s why he believes spending on a house is consumption, not investment.

Second scenario take-aways

The Fed’s second question (rental property vs. stocks) is much closer to an apples-to-apples comparison, although it still surprises me that a majority of respondents would recommend investing in a rental property over stocks.

I’ve never owned rental property, but it strikes me as a more time-consuming type of investment that requires a unique level of expertise. You need to understand the tax laws related to rental real estate, and you need to be prepared for vacancies, potentially expensive maintenance and repairs, tenant screening and the possibility of having to evict someone who doesn’t pay, and more. Plus, a rental property is not nearly as liquid as a stock market investment.

While stock market investing also requires unique expertise, it seems much more accessible, and especially for people who have never invested in rental real estate, much less time-consuming.

What are your thoughts about the Fed’s survey?