The rise in prices resulting from a tight supply of listings has made owning a home a lot more expensive in recent years. However, a strong labor market, relaxed lending standards, and relatively low mortgage rates are still enabling more Americans to make the leap from renting to buying. In fact, new data from the U.S. Census Bureau showed that the homeownership rate in this country ended the third quarter of 2017 at 63.9 percent. That is the second quarterly increase in a row and the highest reading since 2014. The rebound in homeownership has been helped by the growing number of aging Millennials that are getting married and having kids (household formation). Older Americans, though, still have significantly higher rates of homeownership, which makes sense given their typically stronger financial standing.
Owning real estate can also 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. 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, e.g. bonds, real estate, etc. 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, Bloomberg, ZH, FRBSL
Post author: Charles CouchDisclosures