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Real Estate Could Be Dominant Asset Class This Decade



Real Estate Could Be Dominant Asset Class This Decade

If you own real estate, you could be in for a decade of prosperity, says Ritholtz Wealth Management’s Ben Carlson.

After plunging during the Great Recession, homeownership rates are once again steadily climbing higher. This made Carlson believe that “There is a real possibility real estate could be one of the dominant assets of the 2020s.”

He acknowledges that many view owning a home as a terrible investment.

“There’s certainly an argument to be made for that claim when you consider all of the ancillary costs associated with homeownership — property taxes, upkeep, maintenance, insurance, renovations, landscaping, closing costs, etc. Owning a home involves more consumption than almost any investment on the planet,” says Carlson.

There’s data backing up that view, says Carlson, citing the Shiller home price index over the last 100+ years.

“From 1900 through 1996, the total real return for U.S. housing was 10.7%. That’s an annualized gain of 0.1% over the rate of inflation for 97 years! Then from 1997-2019, real housing prices were up 57% or around 2% per year. And those numbers include the fallout from the housing boom and bust.”

No doubt, real estate has lagged other asset classes of late.

Carlson, however, says there are four distinct reasons that he expects real estate to outperform for the rest of the decade.

1. Millennials — Even though the millennial generation is slower to hit milestones than previous generations, Carlson argues that they will eventually get around to accomplishing those milestones, like buying a house.

“Young people are settling down later in life because they are going to school for longer…But millennials were going to begin doing adult things eventually. That means buying houses, even if it comes later in life than it did for their parents. Millennials are now the biggest demographic in the country and will dominate the most common ages in the country for years to come.”

2. Interest rates — Interest rates are historically low, making houses more affordable.

“Lower borrowing rates have kept things more affordable than most people realize,” says Carlson. “If the Fed has their way it sounds like rates are going to stay low for a number of years.

3. Supply — There likely aren’t enough homes available to meet demand.

“The hangover from the bursting of the 2000s housing bubble is still being felt when it comes to the supply of homes in this country,” Carlson said. “New single-family homes for sale are finally on the rise but are still barely at the levels seen in the early-2000s while existing home inventories basically went nowhere for the entire 2010s.”

He says if new home construction doesn’t keep pace with demand, existing home prices will surge higher.

“If builders don’t start making more homes available, prices will keep rising to account for the increase in demand.”

4. Work from home — a massive shift that was sped up by the pandemic.

“There could still be a nasty transition period as employers and employees alike realize they don’t all need to live and work in big cities to be productive,” Carlson said. “Untethering employees from a specific location will allow them to move to more cost-effective areas and potentially change the housing dynamics for a large group of people.”

He doesn’t believe there will be a “death of big cities” like many are predicting. However, he does think that the pandemic has dramatically shifted employers and employee expectations for where work needs to occur. And if remote work becomes the norm, it could dramatically shift housing needs of millions of workers.

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