Real estate has become the â€˜feel goodâ€™ investment in times of economic uncertainty, Milken Institute study finds. Since the 1960s, many Americans have looked to the stock market for investments; residential real estate was just a place to live.
No more. Much like gold in the 1970s, Americans now treat the purchase of residential real estate as the investment of choice in times of economic uncertainty, says a new study from the Milken Institute. That is one reason that investors are pouring money into real estate today as the stock market and U.S. economy have slumped.
According to the authors, there are two reasons for this major behavioral change:
1. Real estate has become the psychological equivalent of gold, which is tangible and was considered a safe store of value through much of history.
2. It is a side effect of the stimulative monetary policy used during recent economic recessions. Reduced interest rates encourage investment in real estate by making it more affordable.
â€œDuring times of economic uncertainty, investors seek assets that â€˜feelâ€™ secure,â€ says the report, by Susanne Trimbath and Juan Montoya. â€œReal estate has replaced gold as the â€˜feel goodâ€™ investment because it is literally as solid as the ground upon which we stand.â€
While real estate was seen by some as a hedge against inflation in the mid-â€™70s â€“ a time of high inflation, stagnant stock markets and uncertainty about the economy â€“ investors nonetheless continued to put their money into real estate and equities at a relatively equal pace.
But around 1980, that changed, as investments in real estate and equities began moving in different directions. In the 1980s, real estate appears to have become the more preferred investment. During the â€™90s, as the stock market rose, investment by households in real estate slowed. And recently, the opposite has happened again â€“ as equities have fallen, investment in real estate has risen.
â€œThe recent stock market decline may actually have helped the housing boom,â€ Dr. Trimbath says. â€œFalling stock prices ease pressure on the Federal Reserve to raise interest rates.â€
Real estate has proven to be a positive investment, too. On average, house prices increased by a compound annual rate of 5.6 percent over the past 25 years, the report states. The value of residential real estate has increased at a rate of more than $1 trillion a year since 1999 and is today worth more than $23 trillion â€“ almost half of which is owned by households.
The authors caution, however, that investors should not expect high growth rates for real estate to continue indefinitely.
â€œAlthough it is expected that homes will continue to appreciate in the near future,â€ they say, â€œvery high growth rates are unsustainable in the long run.â€ But, they add, â€œdonâ€™t expect a bust in housing prices either.â€
For the full report please visit www.milkeninstitute.com.
(source: Milken Institute)