Affluent households loaded with real estate assets are rolling in returns from those investments, but they also may be roiling with some of the highest investment risks.
The so-called "mass affluent group" -- those with investable assets between $100,000 and $1 million -- typically have real estate, at 37 percent, as their largest asset class.
With 23 percent in their principal residence and 14 percent in investment properties, they are at greater risk than those who can better afford the risk, but have a smaller share of investments in real estate, according to Chicago-based Spectrem Group, and affluent and retirement market consulting firm.
Spectrem says the mass affluent have a 76 percent greater exposure to real estate than millionaires (those with investable assets of $1 million or more), who put only 21 percent of their investment stake in real estate -- 13 percent in their principal residence and 8 percent in investment real estate.
The problem for the mass affluents is having so much invested in a real estate market revealing an uncertain immediate future. After nearly a decade of home price appreciation, some markets reveal a sales slow down that is tapping the brakes on appreciation.
"These are strange times for forecasters and analysts. Are we heading into a market lull? Or are we seeing the beginning of a significant downturn? Many of the fundamentals for housing are at a crossroads: Inflation, interest rates, demand, household incomes, prices, and whether homes are a good investment compared to other investments," said Marshall Prentice, president of La Jolla, CA-based DataQuick Information Systems.
Average U.S. home prices increased 12.95 percent from the fourth quarter of 2004 through the fourth quarter of 2005, according to the Office of Federal Housing Enterprise Oversight's quarterly Home Price Index.
OFHEO said the 12.95 rate was "showing no evidence of a slowdown," but the annualized pace in the fourth quarter last year, 11.4 percent, revealed what could be the start of something smaller, especially in high-priced spot markets.
The National Association of Realtors also recently revealed a slow down in price growth.
Nationwide, the median existing single-family home price was $217,900 in the first quarter, up 10.3 percent from a year earlier when the median price was $197,600, but in the fourth quarter of 2005, the annual rate of home-price appreciation was 13.6 percent.
In the nation's priciest market, the San Jose-Sunnyvale-Santa Clara area of California, where the median price was $746,800, prices were up only 1.4 percent in the past year, after years of appreciation as high as 20, 30 percent and more. In another formerly hot market, San Diego, CA, prices rose only 1.9 percent.
Some also speculate that recent slow downs in sales will inevitably push home prices down.
"Mass affluent investors have heavily tied their financial futures to the real estate market, which has been so hot for so long that many believe it has virtually no place to go but down. The most striking fact is that the mass affluent have 76 percent greater exposure to real estate than millionaires. If the real estate market begins to crack, it is the mass affluent who will likely feel the effects both faster and with greater force. The fact that these assets often carry outstanding mortgages increases the risk further still," said Catherine S. McBreen, Spectrem's managing director.
What's most troubling is, as go the mass affluent, so might the rest of the economy. Some 33 million strong, the mass affluent account for 37 percent of the nation's investable assets, according to Spectrem.
Another recent measure of affluent households -- those with $250,000 to less than $1 million in invested assets -- revealed that, among those looking to make increases in their investment portfolios, nearly 80 percent of them were shying away from real estate.
Much larger shares are going to retirement accounts, deposit accounts, mutual funds and stocks, according to Rhinebeck, NY-based Phoenix Marketing International, a marketing research and consulting firm.
"I'm not surprised that less than a quarter of those surveyed said they'd add to their real estate portfolio. After all, these people have seen very large increases in the value of real estate and, quite logically, probably think the market is overheated, as many do here in the Bay Area," said Romeo Danais, a Silicon Valley real estate investor for years, who says he's now pulling up stakes in Silicon Valley to invest in real estate in Oklahoma, New Hampshire and Texas.
David M. Thompson, vice president of affluent practice at Phoenix, says it's also about diversification.
"As wealth increases, there is less percentage-wise in real estate, though not necessarily less in the total dollar amount. As affluent households get wealthier and become more complex, they get advice from professionals about diversification," he said.
