- Gallup polls found Americans have always viewed real estate as the best long-term investment.
- Jenny Schuetz, an economist, says Americans are “overreliant on home equity.”
- She supports savings plans backed by the federal or state government so homeowners are less dependent on the value of their homes.
Americans believe that real estate is the best investment.
His faith in the asset is increasing. In a Gallup poll of Americans last year, more than 40% of respondents chose real estate as the best long-term investment, choosing houses over gold, stocks and savings accounts.
Not only did more people choose real estate than the year before, but it was also the biggest rally behind an option on the list in the last 11 years.
But in her new book, “Fixer-Upper: How to Repair America’s Broken Housing Systems,” Brookings economist Jenny Schuetz discusses the risks of real estate as an investment. She also describes how Americans’ blind faith in home value may be driving the unaffordability crisis.
Schuetz told Insider that Americans’ addiction to real estate is fueled by both logical and illogical reasons.
“There’s always a psychological element to buying a home,” he said.
There are drawbacks to putting all your ‘financial eggs’ in one basket
Rich people constantly extol the virtues of real estate, but Schuetz expands on the drawbacks of real estate.
Housing is an “illiquid asset,” he writes in “Fixer Upper,” meaning you can’t get your cash out in a pinch. It is not a stock or a bond that can be sold in a day. Even in a very active market, selling and closing a house takes time.
Homeowners have some tools to withdraw cash, but Schuetz notes that households with weaker income, credit or assets will have a harder time withdrawing equity from their homes, especially in the event of an economic downturn.
And the perception that homes always increase in value may not hold true across the United States.
“A lot of the media and researchers who write about housing live on the coasts, which are expensive markets and where home prices have gone up a lot,” Schuetz said.
But that is not the case in all corners of the country.
Nationally, the median home price soared 14% last year to $360,000, according to Redfin. But real estate data firm Attom also recorded cities where median home prices declined in 2021, including cities in Texas, Missouri and Illinois.
What worries Schuetz most is how, despite all this, Americans invest a large amount, or even all, of their wealth in real estate despite its risks.
A 2018 study by Deutsche Bank found that a record number of American families, more than 30%, had no wealth outside their homes.
Holding all your money in one asset breaks a cardinal rule of finance: diversification. For better or worse, many Americans have tied their financial destiny to the value of their homes.
Americans’ reliance on real estate has led to skyrocketing prices
Schuetz sees this behavior as fueling the US housing crisis in two ways.
First, as Schuetz describes it, an “overreliance on home equity” leads homeowners to typically resist new developments or policies that they perceive as reducing the value of their home.
“When people see their home, not just as a place to live, but as a store of value and their main financial asset, naturally they make them very protective of that asset,” Schuetz said.
The United States has been underbuilding for a decade and, according to some reports, is missing 5 million homes. Over the past two years, a lack of inventory or supply has collided with a surge in demand and has made homes increasingly unaffordable.
Second, the belief that home values will appreciate faster than inflation may be causing some people to overbid, driving home prices even higher.
“He gets into this kind of frenzy, that if I don’t buy now, I’ll never be able to buy,” Schuetz said.
In reality, he added, it might be riskier to take on that financial burden if home prices drop or if there are unexpected home maintenance costs.
The government can help Americans diversify their investments
Schuetz wants lawmakers to help Americans build more balanced and liquid savings portfolios, making them less reliant on homes to build wealth.
“I wish as a country we had more incentive for people to save through a diversified portfolio,” he told Insider.
Schuetz pointed to the Obama administration’s “MyRA” program. Operated by the Treasury Department, MyRA accounts were aimed at people who did not have access to traditional workplace savings plans. It had 30,000 participants before it closed in 2017, according to The New York Times.
He also highlighted the Individual Development Accounts, a bank account where a person’s contributions are matched with aid at the state level.
Schuetz said millennials, who have been hardest hit by the wild housing market, could hold the keys to the future. Frustrated with the way the market operates, they might champion ways to save and build wealth beyond real estate.
“That’s a great generation with potentially a lot of political power,” he said.