The booming second home market is helping the greater housing market continue rolling like thunder, but most affluent investors are adding quieter investments to their portfolios.
Last year, the median price of investment homes increased by 24 percent -- twice the rate of resale homes, more than three times the rate of new homes and easily more than many other non-real estate investments -- but most affluent investors aren't adding property to their portfolios.
Apparently they have good reason.
Among the 42 percent of affluent households looking to make net increases to their investment portfolios in the next three months, only 21 percent of them will increase real estate holdings, according to Phoenix Marking International.
Much larger shares are going to retirement accounts, deposit accounts, mutual funds and stocks, according to Rhinebeck, NY-based Phoenix, a marketing research and consulting firm.
In February, Phoenix asked 1,100 affluent households -- those with $250,000 to less than $1 million in invested assets -- to specify where they would invest additional assets.
Affluent households planning to increase their investments (42 percent of them) are plowing their assets into:
- Retirement accounts, said 70 percent of households.
- Deposit accounts; 62 percent.
- Mutual funds; 46 percent.
- Stocks; 42 percent.
- Real estate; 21 percent.
- Fixed income; 13 percent.
- Business investments; 11 percent.
- Alternative investments; 3 percent.
Why not put more investment dollars to work in the still booming real estate market?
The fundamentals apply.
- Affluent investors already have sufficient investment risk in real estate.
The group of people Phoenix polled have 46 percent of their total assets locked up in real estate, including their primary residence and other real estate, said David M. Thompson, vice president of affluent practice at Phoenix.
"As wealth grows, they typically become better diversified, with larger allocations to investable asset groups. So there is little room for large growth in real estate among this segment," Thompson said.
The affluent households surveyed have another 40 percent of their assets in more liquid investments, stocks, bonds, mutual funds and deposit accounts, he added.
"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," Thompson said.
- Affluent investors typically need more readily available cash.
"I'm not surprised that real estate investments don't rank higher. After all, real estate is illiquid and when you're a baby boomer looking ahead to retirement, you want to invest in instruments with a fairly predictable record of appreciation that can quickly be converted to cash. Would you really want to bet your retirement on a beach house that could blow away in the next hurricane?" asked Alfred Glossbrenner, co-author of "How to Make Your Vacation Property Work for You" (FireCrystal, $149.95), a workbook and CD package.
The same tangible aspect that imbues the home investment with added value (you can live in it), detracts from the asset as a liquid investment.
While it may be easy to tap a home's equity, unloading the property is taking more and more time as the real estate market gets tighter because of higher home prices and more costly financing.
"Retirement accounts continue to get top billing as they provide immediate and substantial tax deductions at the federal and state income tax levels. More sophisticated investors continue to be concerned about a slow down in the real estate market so they are being more selective about what and where they buy," said Eric Tyson, co-author "Real Estate Investing for Dummies" (John P. Wiley, $21.99)
- Real estate is getting riskier.
Indeed, a study just revealed that while long term home ownership nearly guarantees a sizable investment return, longevity also inevitably opens the door to a downturn in the market cycle. Long term investors don't want to get caught with that door open.
Walnut Creek, CA-based PMI Mortgage Insurance Co.'s Spring Economic and Real Estate Trends (ERET) report says from 1986 to 2005, if you owned a home in one of the 50 largest metropolitan statistical areas (MSAs) your home has enjoyed a sizable increase in value.
However, 48 of the nation's 50 largest MSAs face a greater risk of declining home prices this quarter than they did the last quarter, according to PMI's Market Risk Index.
- Emotions tug harder than potential returns.
An emotional factor often comes into play after buying that first home. Second, third and subsequent home purchases are more likely to be discretionary buys rather than hard core investments.
"The vast majority of second home buyers don't lump their future retirement or vacation home purchase decision in the same category as stocks, retirement accounts and mutual funds. Second homes will always be an emotional buy, even if some may justify their second home purchase as a (wink) 'investment'," says Elisabeth Miller-Fox president of PrivateCommunities.com, portal for renting and buying homes in private and gated communities.
