Home Owners Hit The Mother Lode

Real estate has become the "psychological equivalent of gold" to investors flocking to a tangible asset to find shelter from the economic storm.

Days before Wall Street began it's latest tumble, the Milken Institute published "A New Kind of Gold? Investment In Housing In Times Of Economic Uncertainty" revealing a growing real estate investment trend with home buyers making the most of the land grab.

Of the $23.5 trillion invested in various types of residential real estate in the U.S., the household sector is by far the largest single sector, with a more than $11 trillion share, the institute said.

The share increased this year as sales of new and existing homes hit $522 billion during the first six months, up about 16 percent from $451.3 billion a year, according to the National Association of Realtors.

The institute's report said the total $23 trillion residential share, easily surpasses the $11 trillion market value of all New York Stock Exchange listed stocks, the $6.9 trillion in assets held by commercial banks and the $10 trillion value of the country’s annual economic output.

Residential real estate rules among typical small investors, but commercial real estate is popular too.

Since the beginning of the year, $2.41 billion has flowed into real estate mutual funds, according to AMG Data Services, compared with only $307 million in the same period a year ago and shares in real estate investment trusts (REITs) have climbed 11 percent this year.

Both commercial and home grown real estate investments are helping investors ease or prevent portfolio losses because returns in real estate investments on a national level have remained in positive territory for years -- even as stocks have plummeted. More of the same is expected.

The National Association of Realtors forecasts the national median for existing homes to rise 5.5 percent this year and the new home price is expected to surge even more, 7.4 percent

"During times of economic uncertainty, investors seek assets that 'feel' secure," according to the the institute's report by Susanne Trimbath and Juan Montoya.

"Real estate has replaced gold as the 'feel good' investment because it is literally as solid as the ground upon which we stand. Because residential real estate is fully insurable there is also a perception of protection against loss that is not found in the stock market, adding to the mystique of real estate as a new kind of gold."

What's more, the investment is highly leveraged and it produces several dividends.

Relatively little is spent up front to invest -- sometimes nothing down. Equity growth in the form of price appreciation has been stronger than the rate of inflation in recent years and the equity is protected by tax shelters both during ownership and when the asset is sold.

"It is common for new mortgages to cover 80 percent or more of the value of a home. Yet, mortgages account for only 44 percent of the value of residential real estate. The average homeowner, therefore, is not extraordinarily burdened by his mortgage," the report says.

"The important fact here is that real estate ownership is very highly leveraged, making it more sensitive to interest rate changes than other investments (for example, corporate equity investments). Beyond the tax benefits afforded home ownership financed with debt, the use of leverage raises the return on capital for residential real estate investments beyond mere price appreciation. The earning power of leverage combined with the insurability of property presents an investment that is hard to beat."

Experts caution, however, that while real estate investments are generally sound over the long term, speculating in real estate could be just as disastrous as a stock-heavy portfolio. The report concludes with a bit of a caveat alluding to a real estate market bubble. While the bubble likely won't burst, it could deflate.