An investor’s favorite and most sought out question, the stock market or the real estate market? The stock market has been on an unstoppable rally since the drop in March due to the COVID-19 pandemic, since then there have only been minor corrections during the election period as there was uncertainty regarding the next president of the USA. Real estate on the other hand had the opposite effect when the pandemic hit, the market went from being a seller’s market to a buyer’s market for the first time in years. The article will look at some of the pros and cons of investing in either the stock market or the real estate market for 2021.
Real Estate Market
1. Buyer’s Market – As the pandemic hit, there was a sudden shock in the real estate market where demand and supply both took a hit. The lockdown that took place in all states resulted in a decline in the sale of homes. The pandemic prevented home viewings, interactions between buyers and sellers, and limited inspections. Home sales in the US fell to approximately 4 million from 5.7 million prior to the start of the pandemic. This uncertainty has somewhat lifted and created opportunities for buyers to get real estate at a good price and have more choice. In 2021, as the pandemic recedes, it will be easier to see homes and purchase for investment purposes, however, prices will also start rising.
2. Interest Rate Environment – At the start of the pandemic in March the FED initiated two emergency rate cuts and the FED Funds Rate was reduced to 0-0.25%, following which the Prime Rate was slashed to 3.25%. Mortgage rates hit an all-time low since the housing market crash of 2008 which resulted in an increase in demand. Adjustable-rate mortgages benefited from the reduction in the benchmark rates as it results in lower monthly mortgage payments. It is estimated in 2021, that mortgage rates will remain low and hence it is the ideal time to buy a home or invest in the real estate market.
1. Minimal Decrease in Price – Although the housing market in the US had a greater drop in prices as compared to the Canadian Housing Market, prices have rebounded and remained steady. The decrease in long-term prices or a ‘crash’ that was expected in the real estate market did not occur because of seller’s removing their homes from the market in the hopes of higher prices in the future. Seller’s also found it difficult to put their home for sale and simultaneously find another home, making it difficult to sell in the first place.
2. Stricter Lending Requirements – The pandemic resulted in the loss of jobs, which in turn increased debt, and put greater pressure on homeowners to make their monthly mortgage payments. As a result of this, lenders have tightened their rules to get a mortgage making it harder for first-time homebuyers. Higher than usual credit scores will be required, for example instead of the minimum of 620, at least 720 be needed. Down payment will also be required by most lenders.
1. End of Pandemic – The pandemic is predicted to slow down as vaccine news has come out by companies such as Pfizer and Moderna. These companies have predicted a 90% and 94% success rate respectively. This news is very good for long-term investors and even short-term traders, as it removes a very big uncertainty – lockdowns. Lockdowns resulted in the loss of more than 35 million jobs and brought certain industries to a standstill, such as travel, retail, and transportation according to the Wall Street Journal. Therefore, the end of the pandemic can mean a new bull run for the stock market in 2021 when the world can go back to some semblance of normalcy.
2. Stimulus Package – A stimulus package could not be reached prior to the election due to disagreements between the democratic house and the republican senate. However, now with a new Biden administration, it is predicted that the stimulus talks will come back to the table. This is also a result of the FED advising the government that stimulus is required otherwise the economy will face a very long and difficult path to recovery. A stimulus package is always good news for the stock market as it increases spending and investments.
3. Cyclical Stocks – Cyclical stocks that faced a difficult ordeal during the pandemic are forecasted to rise in 2021, these industries include airlines, hotels, retail, automakers, and restaurants. 2021 with positive vaccine news can result in the rise in these stocks which can propel the entire market for growth.
1. Bull Run – The stock market bull that resulted from March can be a big indicator that another big correction is looming in 2021. The stock market like the business cycle also follows a path of ups and downs with uncertainty. Therefore, most bull runs especially those that have continued for an extended period see a correction with profit-taking and change in market sentiment.
2. Uncertainty – The Stock market is extremely erratic and volatile, this can be seen in the recent months where technical and fundamental indicators have indicated a downturn or reduction in market indexes. However, irrespective of what the indicators predicted, the market has been rising, and a reason for this is the increased retail investing taking place on applications like Robinhood, which allows for free trading. As a result of a surge in retail investing, it is hard to predict the outcome and growth in 2021.
In conclusion, there are several advantages and disadvantages of investing in the stock market and the real estate market. In the real estate market, you can benefit from a low-interest rate environment with several homes to choose from as there are several individuals trying to sell. However, prices have not fallen as much as expected and lenders have become stricter in their mortgage applications as there is an increased risk of default. The stock market has some great opportunities with the pandemic ending, and a stimulus package being considered, but it does have a lot of uncertainty as a result of retail investors and the current bull market. Therefore, the decision depends on your financial needs, if you have lots of savings and are looking for a long-term horizon then the real estate market might be the way, whereas if you have a higher risk tolerance and want short-term gain the volatile stock market will be the better option. Whichever you do decide, always do your due diligence in investments be it stocks or real estate!