Both the S&P 500 and the Dow have standard deviations of monthly returns of about 15% annualized. The figures for the house price series (the S&P/Case-Shiller 10-City and 20-City Composites) are 3.3% and 4.0%. Stock investors would probably worry more often since stock prices will move farther and faster than house prices.
Another aspect of the risk comparison is the depth of the collapse or draw down. Stocks dropped about 50% in both the tech bust and the housing bust; houses fell a comparatively modest 35%. The surprise in the numbers may be diversification and correlation.
While the financial crisis sent everything but treasury bills into a free fall, the correlation between the S&P 500 and the S&P/Case-Shiller 10-City Composite is about 3.5%. Indeed another look at the chart shows that peaks and troughs of houses and stocks do not line up.
The numbers don’t, and can’t, answer the question of which is the better choice between houses and stocks; it depends on the investor, his or her situation and taste for houses, stocks or risk.
About David Blitzer
David M. Blitzer is managing director and chairman of the Index Committee with overall responsibility for index security selection, as well as index analysis and management. Prior to becoming Chairman of the Index Committee, Dr. Blitzer was Standard & Poor’s Chief Economist. Before joining Standard & Poor’s, he was Corporate Economist at The McGraw-Hill Companies, S&P’s parent corporation.