Retirement, Markets, Financial Planning

Real Estate, Long-Term Investing, And Diversification

8/29/18 8:00 AM

iStock-626627280.jpgThe 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, generally relaxed lending standards, and relatively low mortgage rates are still enabling many Americans to make the leap from renting to buying. In fact, updated data from the U.S. Census Bureau showed that the homeownership rate in this country rose during the second quarter of 2018 to 64.3 percent, 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).

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Compared to older generations, though, Gen-Y has a significantly lower rate of homeownership at this stage in life (see below). Student loans can receive much of the blame because although Millennials are by far the best-educated cohort of the U.S. workforce, many young adults had to borrow a lot of money to pay for college. These often substantial liabilities can make setting aside enough money for a down payment on a home extremely difficult, especially with wage growth being sluggish for most of the current economic expansion. Moreover, researchers at the Urban Institute estimated that each additional $50,000 in education debt can lower a person’s likelihood of owning a home by 15 percentage points.

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However, student loans are not the only reason that homeownership is relatively low among young adults. Some Millennials, for instance, may simply be hesitant to invest the little savings they have been able to amass in real estate when other ventures appear more rewarding. Indeed, home prices in inflation-adjusted terms fell by roughly 50 percent from peak to trough due to the bursting of the housing bubble and subsequent financial crisis and “Great Recession.” Years later home values have yet to fully recover even with the rapid price gains seen recently. The stock market, on the other hand, fell by even more during this same period but also rebounded significantly faster. In fact, the benchmark S&P 500 is now about 50 percent above its pre-crisis peak in inflation-adjusted terms.

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The housing market’s recent underperformance has also been noticed by older Americans, and a new Bankrate poll revealed that a plurality of adults of all ages now view the stock market as the best long-term investment. That is the first time in four years that respondents have not considered real estate to be the best place to park their money for the long run. In some ways this is an encouraging development since too many Americans had to learn the hard way from the bursting of the housing bubble that the “home values only go up” adage is not always true. It is especially important that older individuals are aware of this because they are the most sensitive to a housing market collapse and could even have to postpone retirement if homes suddenly become extremely illiquid assets that are rapidly losing value.

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In such a scenario any retirees without additional savings could also be at risk of having to borrow against their declining home value in response to medical bills and other large, unexpected expenses. What is worse is that this may not even be an option for many seniors because a report from the Kaiser Family Foundation revealed that an alarming number of older Americans have very little home equity. However, all of this does not mean people should avoid using real estate as a long-term investment vehicle. Instead, savers should strive to use every tool at their disposal (real estate, 401(k)s, IRAs, etc.) to essentially diversify their retirement assets in the same way that a portfolio of stocks would be diversified. Doing this can lessen their sensitivity to the value of any single retirement asset and in turn help ensure financial security in old age.

 


 

Sources: U.S. Census Bureau, CNBC, Bloomberg, Bankrate, KFF

Post author: Charles Couch

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