Markets, Financial Planning, Retirement

Real Estate And Retirement Diversification

11/26/19 8:00 AM

A healthy labor market, very low mortgage rates, a moderation in housing inflation, and relatively relaxed lending standards are together enabling many Americans to finally 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 third quarter of 2019 to 64.8 percent. That matches the highest reading since Q4 2013 and is a marked rebound from the half-century low hit during Q2 2016.

The uptick in homeownership has been helped by aging Millennials increasingly getting married and having kids (household formation). Older generations did have significantly higher rates of homeownership at this stage in life, but recent data suggest conditions are finally improving for young Americans. For example, the proportion of home sales going to first-time buyers is on the rise, and growth in the number of homeowners under the age of 35 has surged. One of the reasons it is encouraging to see more people become homeowners is the role real estate can play in wealth diversification. Indeed, the stock market can generate excellent investment returns over a long time horizon, but even a well-diversified portfolio cannot always eliminate the risks associated with recessions and other macro shocks.

Put simply, spreading your money across a wide variety of equities can help reduce the risks associated with any particular company or industry but exposure to a broad market selloff will not be completely eliminated. To better protect against such scenarios, a retirement portfolio must therefore be diversified not just in stock allocations but also across asset classes. Bonds and cash are common alternatives to equities, and their importance increases as people near the age of retirement, but surveys suggest Americans still prefer real estate for long-term investing. A recent Bankrate poll, for instance, found that a 31 percent plurality of U.S. adults believe real estate is the best place to park money they will not need for at least a decade, and a similar sentiment was expressed by Americans in an earlier Gallup survey.

Despite the high favorability, it is important to understand that investing in real estate is far from risk-free. That is something many Americans learned the hard way after the housing market peaked in 2006 and the “home values only go up” adage was proven wrong. However, this also does not mean that people should avoid using real estate as a long-term investment vehicle, but rather that 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 as they would a portfolio of stocks. Doing this can lessen the sensitivity of an individual’s total wealth to the value of any single retirement asset and in turn help ensure financial security in old age.



Sources: U.S. Census Bureau, National Association of Realtors, Twitter, Prudential, Bankrate, Gallup

Post author: Charles Couch