Markets, Financial Planning, Retirement, Economy

Homeownership And Investment Diversification

5/2/17 8:00 AM

iStock_75274009_SMALL.jpgNew data from the U.S. Census Bureau showed that the homeownership rate in America, i.e. the proportion of owner-occupied households in this country, ended the first quarter of 2017 at 63.6 percent. That is down slightly from the previous quarter but still a solid increase from the half-century low hit during Q2 2016. The improvement has occurred even in the face of higher mortgage rates and above-trend housing inflation, thanks in part to the continued strength in the U.S. labor market, slight uptick in wage growth, and rapidly rising rents.

The rebound in homeownership has also been helped by aging Millennials increasingly getting married and having kids (household formation), although older Americans still have significantly higher rates of homeownership. That makes sense given their typically stronger financial standing. Further, owning real estate can play a big role in proper wealth diversification. This is an important concept that investors of all ages should understand because during a macro shock like the 2007-2008 financial crisis, stock correlations can spike. This means that equities which normally would not have traded similarly suddenly move in lockstep, thereby removing the main benefit of diversification.

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Put simply, spreading your money across a wide variety of stocks can help reduce the risks associated with any particular company or industry but exposure to a broad market selloff will not be eliminated. To help protect against such scenarios, a retirement portfolio must therefore be diversified not just in stock allocations but also across asset classes. Bonds are a possible alternative but their mechanics can be confusing to many retail investors. Since a house is a tangible asset and homeownership is conceptually more straightforward than fixed income trading, it should not be too surprising that a Bankrate survey found real estate to be preferred by significantly more Americans over bonds as a long-term investment. Real estate was even preferred over stocks, cash-like vehicles, and precious metals.

Despite the high favorability, it is important to understand that real estate is far from a risk-free investment. That is something that many Americans learned the hard way after the housing market tanked and the “home values only go up” adage was proven wrong. However, this does not mean that people should avoid using real estate as a long-term investment vehicle. Instead, savers must strive to utilize every tool at their disposal (real estate, 401(k)s/IRAs, HSAs, etc.) in order to essentially diversify their retirement assets in the same way that a portfolio of stocks should be diversified. Doing this can lessen the sensitivity of an individual’s total wealth to the value of any particular retirement asset and in turn help ensure financial security in old age.

 


 

Sources: U.S. Census Bureau, FRBSL, ZH, Bankrate

Post author: Charles Couch

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