Too Many People Think Real Estate Is the Best Investment, Economist Says

  • Gallup polls found Americans consistently saw real estate as the best long-term investment. 
  • Jenny Schuetz, an economist, says Americans have an “overdependence on home equity.” 
  • She supports federal or state-backed savings plans to make owners less reliant on their homes’ value.

Americans believe real estate is the best investment. 

Their faith in the asset is increasing. In a Gallup poll of Americans last year, more than 40% of respondents chose real estate as the best long-term investment — picking homes over gold, stocks, and savings accounts.

Not only did more people choose real estate than in the previous year, but it was also the largest rally behind one option on the list in the past 11 years. 

But in her new book, “Fixer-Upper: How to Repair America’s Broken Housing Systems,” the Brookings economist Jenny Schuetz breaks down the risks of real estate as an investment. She also outlines how Americans’ blind faith in home value may be driving the unaffordability crisis.

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

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

There are drawbacks to putting all your ‘financial eggs’ in one basket 

Rich people constantly extol real estate’s virtues, but Schuetz expands on real estate’s drawbacks.

Housing is an “illiquid asset,” she writes in “Fixer Upper,” which means you can’t get your cash out in a pinch. It’s not a stock or bond that can be sold in a day. Even in a very hot market, selling and closing on a house take time.

Homeowners do have some tools to pull cash out, but Schuetz points out that households with weaker income, credit, or assets will have the hardest time pulling equity out of their homes — especially in the event of an economic downturn. 

And the perception that homes always increase in value may not be true everywhere in the US.

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

But that’s not the case in every corner of the country.

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

What troubles Schuetz the most is how, despite all this, Americans sink a large amount — or even all — of their wealth into real estate despite its risks. 

A 2018 study from Deutsche Bank found a record-high number of American families, over 30%, had no wealth outside their homes. 

Tying up all your money into one asset breaks a cardinal rule of finance: diversification. For better or worse, many Americans have hitched their financial fate to their homes’ value. 

Americans’ reliance on real estate has led to sky-high prices  

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

First, as Schuetz describes it, an “overdependence on home equity” drives homeowners to typically resist new developments or policies that they perceive as reducing their home value.

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

America has been underbuilding for a decade and, by some accounts, is short 5 million homes. During the past two years, a lack of inventory, or supply, has clashed with an uptick in demand and made homes increasingly unaffordable. 

Second, a belief that a home’s value will appreciate faster than inflation may be causing some people to overbid, driving up home prices even more. 

“It gets into this kind of frenzy, that if I don’t buy now, I won’t be able to buy ever,” Schuetz said. 

In reality, she added, it might be riskier to take on that financial burden if home prices fell or there were unexpected maintenance costs for the home. 

The government can help Americans diversify their investments 

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

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

Schuetz pointed to the Obama administration’s “MyRA” program. Operated by the Treasury Department, MyRA accounts were directed at people who didn’t have access to traditional workplace savings plans. It had 30,000 participants before it was shut down in 2017, according to The New York Times.

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

Schuetz said millennials, who have been hit hardest by the wild housing market, might hold the keys to the future. Frustrated with how the market operates, they could champion ways to save and build wealth beyond real estate.

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