Mitigate Risk
“There are risks and costs to a program of action. But they are far less than the long-range risks and costs of comfortable inaction.” - JFK
Tom Skinner of Redbrick Partners wrote this awhile back, “The plummeting equity markets between 2000 and early 2003 have prompted many homeowners to ask if they should brace for a similar deterioration in housing prices—and what, if anything, they can do about it.
Nationwide, housing prices have risen every year since records have been kept. However, this masks the true risk to a homeowner. Most people do not own a diversified basket of U.S. housing assets, but a single house in a specific geographic market. Many of these regional markets have suffered substantial price declines.
For example, in the mid 1980s, as oil prices fell below $10 a barrel, the price of housing in Houston fell by more than 25 percent. In the early 1990s recession, Los Angeles lost more than 10 percent of its jobs; house prices subsequently fell by more than 20 percent. Even for those with several homes in different regions, recent softening in luxury housing markets has brought home the fact that everyone with a significant investment in real estate is at risk. Indeed, real estate comprises nearly 15 percent of affluent Americans’ portfolios, on average; equities account for 20 percent, according to a study by Merrill Lynch and Cap Gemini.”
So what can you do to hedge your housing risk… diversify in several markets. This takes planning and you lose the economies of scale with property management fees but in the long run it will minimize your exposure to fluctuations in price and/or catastrophic event.
I purchased my first rental property in Las Vegas the summer after 9/11. Although it was tempting to buy another property, I moved on to other markets. There is always the chance that down the road there could be a terrorist attack on The Strip. Think what would happen if I owned a handful of properties there. That would be similar to buying only AOL stock back in 1999.
Tom Skinner of Redbrick Partners wrote this awhile back, “The plummeting equity markets between 2000 and early 2003 have prompted many homeowners to ask if they should brace for a similar deterioration in housing prices—and what, if anything, they can do about it.
Nationwide, housing prices have risen every year since records have been kept. However, this masks the true risk to a homeowner. Most people do not own a diversified basket of U.S. housing assets, but a single house in a specific geographic market. Many of these regional markets have suffered substantial price declines.
For example, in the mid 1980s, as oil prices fell below $10 a barrel, the price of housing in Houston fell by more than 25 percent. In the early 1990s recession, Los Angeles lost more than 10 percent of its jobs; house prices subsequently fell by more than 20 percent. Even for those with several homes in different regions, recent softening in luxury housing markets has brought home the fact that everyone with a significant investment in real estate is at risk. Indeed, real estate comprises nearly 15 percent of affluent Americans’ portfolios, on average; equities account for 20 percent, according to a study by Merrill Lynch and Cap Gemini.”
So what can you do to hedge your housing risk… diversify in several markets. This takes planning and you lose the economies of scale with property management fees but in the long run it will minimize your exposure to fluctuations in price and/or catastrophic event.
I purchased my first rental property in Las Vegas the summer after 9/11. Although it was tempting to buy another property, I moved on to other markets. There is always the chance that down the road there could be a terrorist attack on The Strip. Think what would happen if I owned a handful of properties there. That would be similar to buying only AOL stock back in 1999.
posted by Nina Smith at 10:13 PM
Links to this post:
Create a Link
<< Home