Has Real Estate or the Stock Market Performed Better Historically?

For the majority of U.S. history—or at least as far back as reliable information goes—housing prices have increased only slightly more than the level of inflation in the economy. Only during the period between 1990 and 2006, known as the Great Moderation, did housing returns rival those of the stock market. The stock market has consistently produced more booms and busts than the housing market, but it has also had better overall returns as well.

Any results derived from comparing the relative performance of stocks and real estate prices depend on the time period examined. Examining the returns from just the 21st century looks very different than returns that include most or all of the 20th century.

Stock Market vs. Housing Market Returns

The simplest way to compare stock and real estate is by examining the indexed performance of both markets. From March 1992 to March 2022, the U.S. average growth rate was 5.3%. The S&P 500 returned 9.65% annualized from the beginning of 1992 to the same period in 2022.

The inflation-adjusted appreciation on the Dow Jones Industrial Average (DJIA) over the same 30-year period was 5.565% per year, and that's just for asset value. If you assume that dividends are reinvested, the returns are better than 8.044%. Over time, stocks outperformed real estate.

Or, consider the 47 years between 1975 and 2022. A $100 investment in the average home (as tracked by the Home Price Index from the Federal Housing Finance Agency [FHFA]) in the fourth quarter of 1975 would have grown to about $928 by the first quarter of 2022. A similar $100 investment in the S&P 500 at the beginning of 1975 would yield approximately $19,351 in 2022, provided all dividends were reinvested.

Key Differences

While stock prices and housing prices both reflect the market value of an asset, one should not compare houses and stocks for market returns only. For one, stocks are historically more volatile than real estate, meaning that those higher returns may also come with higher risk.

Stocks represent an ownership interest in a publicly-traded company. They are not tangible, physical assets and serve no utility other than a store of value and a liquid security instrument. While there is some reason to believe that the overall stock market would gain in real (as opposed to nominal) value over time, there is little reason to believe that a single stock should grow in perpetuity.

Real estate is not like stocks. Some people speculate with real estate prices, but commercial and residential real estate serve tangible functions. People live in houses and condominiums. Businesses operate out of commercial property. Physical property has value.

This introduces two conflicting phenomena. On the one hand, existing real estate structures should naturally lose value over time through wear, tear, and depreciation. An unmodified home has no reason to grow in value over time; all of the floors, ceilings, appliances, and insulation age and become less valuable.

On the other hand, the average homes built in 2015 were arguably superior to the average homes built in 1915. While existing structures shouldn't gain value, new structures should be more valuable on the basis of their structural and functional improvements.

The Bottom Line

Although real estate and stocks have historically performed well, stocks outpace real estate in returns. Alternatively, stocks have experienced more peaks and valleys, making them a riskier investment. Despite their potential to generate sizeable returns, stocks have no tangible value; on the other hand, real estate is a valuable, tangible asset and profit generator. Which investment is best depends on more than just their returns; other factors must be considered. But if history is an indicator of future performance, both stand to produce attractive gains in the long run.