It’s been a rough couple of months for equity investors. We’re currently in the midst of the most severe market downturn since March 2021, when markets were rocked by the start of the COVID-19 pandemic. A combination of investor concerns around inflation and growing chatter about the likelihood of a recession are weighing on the financial markets. This is evidenced by the precipitous drop we’ve seen in the markets, which came to a head the week of June 17th. The Dow Jones Industrial Average fell below 30,000 for the first time in more than a year. The S&P 500 did not fare much better, at one point being down 24% from its all-time high reached in January 2022. Nasdaq is also down significantly from its peak, falling more than 30% from its record high in November 2021.
As a result of this instability and devaluation, many are taking a fresh look at real estate investments as a safer alternative to the stock market. Real estate offers several benefits in stormy economic times, including property appreciation, steady income, and its place as a durable, physical asset that has the potential to withstand the trials and tribulations of a bear market. Let’s look at why real estate has the potential to be a safer investment track and how investors can leverage real estate to add stability to their portfolios, while still maintaining growth during an inflationary environment.
Fleeing Volatility
It’s not exactly a secret that certain sectors of the stock market, notably tech, experience significant volatility. This is partially due to the fact that many tech stocks – like Tesla, Uber, or Doordash – trade on future earnings and the perspective of big gains down the line. Many tech stocks flourished during the era of cheap credit, where investors were seeking anywhere to park their cash and potentially see a big payout down the line. However, this means that when the market turns, high-flying tech stocks are often the first to drop, and not insubstantially.
There are several reasons why tech stocks tend to see precipitous drops during wide scale stock market devaluations. While all stocks depend on revenues, tech companies’ valuations are often heavily based on potential future earnings – far more so than traditional blue-chip firms. For example, Coca-Cola (KO) trades based on the amount of product they currently ship, namely beverages, as well as projected earnings down the line.
Conversely, a stock like Tesla trades mostly based on future earnings and the potential for the company to hit a home run with various technologies like self-driving cars or earnings from their “Gigafactories” which aim to supply car batteries not only to Tesla but also to other auto manufacturers. When we see an economic downturn, these stocks get hit hard, largely due to the fact that they’re trading on potential future earnings rather than current revenue.
Additionally, many tech stocks trade based on market trends and investor sentiment – the effect of how the investing public “feels” cannot be understated. For instance, take Gamestop, a once flagging retailer of video games, which saw immense attention from retail investors and significantly outpaced analyst expectations – largely due to the buzz, press, and social media like Reddit and Twitter. While such sentiments may provide a short-term boost for a stock, they often ignore underlying fundamentals, which can lead to overvaluations and significant corrections during an economic downturn. These “herd effects” are visible in many sectors, including real estate, as we saw prior to the 2008 crash, but they can be more devastating to investors in the equities markets, where there is not necessarily a hard asset to create a bottom, as we see with housing.
Real Estate as a Safe Haven
This brings us to our next point – where do investors go when the market takes a dive? Historically, there have been several sectors where investors like to park their cash during a downturn. The usual suspects for such investments are companies that provide essential services, such as food producers, education, military suppliers, precious metals, or… real estate. Regardless of underlying market conditions, people always need a place to sleep and eat. This makes many forms of real estate, particularly residential real estate, a safer place to store your savings during an economic downturn.
Real estate assets tend to perform relatively well also during downturns. For one, they are real assets with a real-world use case. People are always going to need a place to live and land is in limited supply. Real estate assets also offer steady cash flows in the form of tenant rents, making them powerful vehicles for both wealth preservation and growth. Appreciation of the underlying asset is another good reason for real estate investment. This is why almost all high-net worth investors in the United States hold some of their wealth in real estate assets.
SecondRE – A Real Estate Investment Platform for Secondary Trading Opportunities
One qualm that investors often have with real estate assets is the high cost of entry and the sweat equity it takes to find the right property, one that will create cash flows and appreciate over time. SecondRE is a real estate investment platform where investors can find real estate investment opportunities that fit within their personal appetite for risk and reward while maintaining ever-so-important portfolio diversification. The platform offers fractional ownership of vetted, cash-generating real estate properties. SecondRE’s advantage over other real estate marketplaces is that it offers liquidity that is similar to traditional equities, so that your funds are not locked-in to a single large purchase that can be hard to turn into cash when you need it. On SecondRE Marketplace, you’re able to sell your holding, with the sponsor’s blessing, at any time and price. Check out some of the opportunities on offer at SecondRE, by clicking here.