The Case for Building Wealth With Stocks, Not Homes

Once upon a time, a young family bought a modest three-bedroom Cape, the worst house in the best location in a prosperous suburb. Many years later, during the housing frenzy of 15 years ago and after the kids had grown and moved away, they received an unsolicited cash bid—for 20 times what they paid. That became their nest egg, which provided a comfortable retirement.

It’s all true, but it might as well be a fairy tale. Such an escalation of home prices is unlikely to repeat, especially from here after their frantic climb. Over the long term, history shows the stock market has returned about twice as much as residential real estate. And it’s done so with far fewer headaches than the attendant expenses of upkeep, which have come as a shock to many recent home buyers.

Looking at the data assembled by NYU Stern School of Business professor Aswath Damodaran, stocks (as measured by the S&P 500) returned 12.47% annually from 1972 to 2021, versus 5.41% for residential housing (based on the Case-Shiller Index, through last October), a span that encompasses inflation’s liftoff after the dollar’s link to gold was severed. Looking at 2012-2021, which takes in the recovery from the housing bust that precipitated the 2007-09 financial crisis, stocks returned an average 16.98%, versus 7.38% for housing.

In a new paper prepared for the Brookings Institution, Robert Shiller, a creator of the housing index, and Anne K. Thompson found 72.4% of respondents in a survey said recent bidding wars had resulted in “panic buying that caused prices to become irrelevant.” That was attributed to the now-familiar story of buyers wanting more room, especially for a home office, in the suburbs. White-collar workers who could work from home were mostly unscathed or benefited from lower spending outlays during the worst of the pandemic.

Historically low mortgage interest rates further leveraged bidders’ buying power. With Freddie Mac’s average 30-year loan down to 3.05% in December, the monthly payment on the median-priced house of $408,100 in the fourth quarter, bought with a 20% down payment, would be US$1,385. With the jump in mortgage rates, to 4.67% as of March 31, that same loan would cost US$1,687 a month. The reduction in affordability is sure to slow home-price appreciation.

Shiller and Thompson found that recent buyers are realistic about near-term home-price trends, expecting some moderation, but may be “given to flights of fancy for the longer run.” Damodaran’s parsing of their data showed buyers at the peak of the previous bubble in 2006 didn’t recover fully from the ensuing bust for 10 years. That wasn’t the first time home buyers were stuck with losses. After the dip from the peak in 1989, prices didn’t recover fully until 1992. And those losing spans didn’t take into account transaction costs, which are huge for residential real estate.

It’s axiomatic that buying high lowers future returns. In human terms, stuff happens, from better job opportunities elsewhere—especially given the ability to work from anywhere for knowledge workers—to unfortunate circumstances such as death and divorce. The ability to pick up stakes with totally portable and liquid financial assets may provide more freedom in the near term, along with greater wealth over the longer span.

Could a recession be the best time to launch a tech startup?

A recent study suggests that is the case. The authors found that tech startups that began operations during the 2007-09 recession—and received their first patent in that time—tended to last longer than tech startups founded a few years before or after. And those recession-era companies also tended to be more innovative than the rest.

“The effect of macroeconomic trends is not always intuitive,” says Daniel Bias , an assistant professor of finance at Vanderbilt University’s Owen Graduate School of Management, who co-wrote the paper with Alexander Ljungqvist, Stefan Persson Family Chair in Entrepreneurial Finance at the Stockholm School of Economics.

Drawing on data from the U.S. Patent and Trademark Office, the authors examined a sample of 6,946 tech startups that launched and received their first patent approval between 2002 and 2012.

One group—about 5,734 companies—launched and got their patent outside of the 2007-09 recession. Of those, about 70% made it to their seventh year. But the startups that launched and got their first patent during the recession—about 1,212 companies—were 12% more likely to be in business in their seventh year.

These recession-era firms were also more likely to file a novel and influential patent after their first one. (That is, a patent the researchers determined was dissimilar to patents in the same niche that came before it, but similar to ones that came after it.)

So, why did these recession-era firms outperform their peers? Labor markets played a big role.

A widespread lack of available jobs meant that the startups were able to land more productive and innovative employees, especially in their research and development groups, and then hold on to them. More important, the tight labor markets also meant that the founding inventors—the people named on the very first patent—were more likely to stick around rather than try for opportunities elsewhere.

For startups started during the 2007-09 recession, founding inventors were 25 percentage points less likely to leave their company within the first three years. On average, about 43% of founding inventors in the entire sample left their startup within the first three years.

“Our study really highlights the importance of labor retention for young innovative startups. Retaining founding inventors cannot only help them survive, but also thrive,” Bias says.

The Case for Building Wealth With Stocks, Not Homes

Such an escalation of home prices is unlikely to repeat, especially from here after their frantic climb

A study suggests that when jobs are hard to come by, the best workers are more available—and stay longer