• Gallup polls found Americans have always viewed real estate as the best long-term investment.
  • Jenny Schuetz, an economist, says Americans are “too dependent on the equity in their homes.”
  • She supports federal or state-backed savings plans to make homeowners less dependent on the value of their homes.

Americans think real estate is the best investment.

Their confidence in the asset increases. In a Gallup poll of Americans last year, more than 40% of respondents chose real estate as the best long-term investment – choosing homes over gold, stocks and accounts. ‘saving.

Not only did more people choose real estate than the previous year, but it was also the biggest rally behind any 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 breaks down the risks of real estate as an investment. She also describes how Americans’ blind faith in home value may be at the root of the affordability crisis.

Schuetz told Insider that Americans’ reliance on real estate is fueled by both logical and illogical reasons.

“There’s always a psychological element to buying a home,” she said.

There are downsides to putting all your “financial eggs” in one basket

Wealthy people constantly extol the virtues of real estate, but Schuetz expands on the downsides of real estate.

Housing is an “illiquid asset,” she writes in “Fixer Upper,” meaning you can’t cash out in a heartbeat. It is not a stock or bond that can be sold overnight. Even in a very hot market, selling and closing a home takes time.

Homeowners have some tools for withdrawing money, but Schuetz points out that households with lower income, credit or assets will have the most difficulty withdrawing equity from their homes, especially in times of crisis. economic downturn.

And the perception that homes always go up in value may not be true everywhere in the United States.

“A lot of media and researchers who write about housing live on the coasts, which are expensive markets and where housing prices have gone up a lot,” Schuetz said.

But this is not the case in all corners of the country.

Nationally, the median home price jumped 14% last year to $360,000, according to Redfin. But real estate data firm Attom also recorded cities where median home prices fell in 2021, including cities in Texas, Missouri and Illinois.

What troubles Schuetz most is how, despite all this, Americans are investing much — if not all — of their wealth in real estate despite its risks.

A 2018 Deutsche Bank study found that a record number of American families, more than 30%, had no wealth outside of their household.

Tying all your money into a single asset breaks a cardinal rule of finance: diversification. For better or for worse, many Americans have tied their financial fate to the value of their home.

Americans’ reliance on real estate has led to exorbitant prices

Schuetz sees this behavior driving the US housing crisis in two ways.

First, as Schuetz describes, an “overreliance on home equity” causes homeowners to generally resist new developments or policies that they perceive to reduce the value of their home.

“When people view their home, not just as a place to live, but as a store of value and their primary financial asset, that naturally makes you very protective of that asset,” Schuetz said.

America has been under construction for a decade, and by some accounts, 5 million homes are missing. Over the past two years, a lack of inventory, or supply, has run into rising demand and made homes increasingly unaffordable.

Second, the belief that a home’s value will appreciate faster than inflation can cause some people to bid higher, driving up home prices even more.

“It gets into this kind of frenzy, that if I don’t buy now, I can never buy,” Schuetz said.

In reality, she added, it could be riskier to shoulder that financial burden if house prices drop or there are unexpected maintenance costs for the home.

The government can help Americans diversify their investments

Schuetz wants policymakers to help Americans build more balanced and liquid savings portfolios, making them less dependent on homes to build wealth.

“I wish as a country we had more incentives for people to save through a diversified portfolio,” she told Insider.

Schuetz pointed to the Obama administration’s “MyRA” program. Managed by the Treasury Department, MyRA accounts were intended for people who did not have access to traditional workplace savings plans. It had 30,000 attendees before it closed in 2017, according to The New York Times.

She also pointed to Individual Development Accounts, a bank account where a person’s contributions are matched by state-level aid.

Schuetz said millennials, who have been hardest hit by the wild housing market, may hold the keys to the future. Frustrated with how the market works, they might advocate ways to save and create wealth beyond real estate.

“It’s a great generation with potentially a lot of political power,” she said.