Young, Rich Real-Estate Dummies

(Originally published here.)

The Wall Street Journal reports that well-to-do young Americans prefer to put their savings into “safe” luxury real estate rather than “risky” equities. Some are wealthy heirs and heiresses who have nothing better to do with their money. Others are members of the nouveau riche, cashing out their Facebook shares for houses in San Francisco. Yet most people described in the article are simply young, rich and dumb.

Matt Winter, a 28-year-old interior designer in L.A. says that he “always felt that having your money in property is the safest and best thing to do if you want to grow your personal wealth.” That was why he spent $1.7 million on his new home, after having spent about $1 million on his first home two years ago. Winter goes on to say that he owns no stocks because equities “spook him.”

Grant Allen, a financier who works in Washington D.C., says that he views the stock market “with a lot of skepticism” and that “these days, I feel like you need to put your money in something that’s more of a sure thing.” That’s why he convinced his fiancée to keep her condo as a rental property after she moved in with him.

Oren Alexander, a 26-year-old real estate broker in New York, owns no stocks, preferring instead to put all of his savings in real estate. He is in the midst of buying an apartment for $1.5 million because “my generation — we got burned pretty bad by the stock market, we’re tired of paying rent, and we don’t see any better place to put our money.”

If you didn’t know better, you might think that this article had been written in 2002 or 2003. Back then, real estate looked like the asset class most resilient to the economic cycle. After the housing bubble and bust, however, it seems odd to be reading stories of young people traumatized by downturns in the stock market who nevertheless describe housing as “a sure thing.” New suckers every minute, I suppose.

In case it’s not obvious, recent history doesn’t support the narratives of the people featured in the article. The S&P 500 stock index hit its last peak in October 2007. (It finally surpassed that level this past March.) Someone who had bought $100 of shares at that market top and reinvested all dividends would currently have about $123. By contrast, the Case-Shiller index of U.S. home prices is still more than 25 percent below the peak reached in mid-2006.

S&P 500 vs. Case-Shiller Index (2005 - present) Source: Bloomberg

S&P 500 vs. Case-Shiller Index (2005 – present) Source: Bloomberg

Individual luxury properties might have done a lot better than the aggregate stock market, of course. They might also have done much worse. And past performance is no guarantee of future results. If anything, the reverse is true. In general, it isn’t smart to put all of your savings into a single product, whether it’s your home, or gold bullion, or the stock of an individual company.

It’s slightly less stupid to own several houses or a basket of stocks. An even better way to save is to own a range of assets that tend to go up over time but that don’t move together over shorter periods. The benefits that come from this sort of diversification are so well known that they were even discussed thousands of years ago by Talmudic rabbis. (They recommended an even split between cash, real assets and business equity.)

Fortunately, the people profiled in the article all seem capable of withstanding the risks involved. If they go broke, it probably won’t create the same kind of downward cascade caused by the recent housing bust. Moreover, my anecdotal knowledge of people in their 20s suggests that few are interested in buying expensive residential property for its value as a savings vehicle. Even so, it’s never good to hear stories about people making dumb investment decisions.

(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter.)


About Matthew C. Klein

I write about the economy and financial markets for Bloomberg View. Before that I wrote for The Economist on a fellowship provided by the Marjorie Deane Financial Journalism Foundation. I have worked at the world's largest hedge fund and read every FOMC transcript since May, 1987.
This entry was posted in Uncategorized. Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s