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Where to Invest Housing Vs Stock Market

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Introduction In order to make an investment, investors often reflect either risk averse or risk taking attitudes which depend upon their willingness to take the risks. Based on this assumption, investors rationally make decisions to maximize their returns and limit their risks. This also means that the investors have to rationally decide investing into different markets and instruments which coincide with their investment preferences therefore, choosing between investing into stock market or housing market is based on such investment preferences.
This paper will paper will discuss as to when it makes a sense for an investor to invest into housing rather than stock market.
Housing Vs Stock Market
It is generally believed that prices in housing market tend to inflate at the time when stock market performs better. This correlation suggests that a high performing stock market tend to improve the overall economic environment which also supports other markets. However, what is also important is the fact that while considering making a decision to investing into housing or stock market is dependent on the returns offered by the alternative investments at the acceptable level of risk. (Blake, 2000). Therefore, if all other things do not change. investor will make a decision where return is higher and risk is minimum.
What is however, most critical is the fact that investors often face dilemma when the respective risk profiles of markets start to show greater volatility. It is very well known that making an investment into stock market is the riskiest investment because stock markets, historically, have shown greater volatility, hence greater risk, over the long period of time. On the other hand, other markets such as housing, bonds, money markets do not show such historical volatility therefore even if all other things remain constant, a prudent decision maker will prefer to invest into housing market if risk profile i.e. the overall volatility in returns offered by stock market tend to increase.
The volatility in the stock markets tend to be on higher side when , at the macro economic level, the general performance of the economy show declining trends or at the micro economic level, when firms start to perform badly. Thus the linkage between the stock market returns and the corporate profits is strong and any significant shift into either of variables could make stock market an unfavorable place to invest. Further, stock market is relatively speculative market as compared to housing market therefore generally, for a risk averse investor, investing into housing market would be a more prudent investment decision. Further, investing into stock market is often a technical job and would require the services of the experts to suggest which investment to make. This therefore, increases the overall transaction costs and reduces the profits whereas making an investment into housing market may not require such expertise. (Hoak, 2008).
It is also critical to understand that making an investment into housing market instead of stock market would make sense when the stock market is on downward trend. If stock market index show significant decline over a reasonable period of time, investors attempt to diversify their investments by investing into housing markets because prices in housing markets decline marginally as compared to prices in stock market and when stock market picks up, housing prices also tend to increase too thus offering an opportunity to earn above average profits.
References
1. Blake D (2000). Financial Market Analysis. New York: John Wiley. 722.
2. Hoak, Amy. (2008). Real estate opportunities beckon some to use retirement funds to invest. Available: http://www.marketwatch.com/news/story/housing-market-beckons-more-invest/story.aspxguid={4740F69A-1CDE-4825-9122-7D7528968B61}. Last accessed 03 December 2008.