An inverted yield curve is a negative indicator for stock returns, prompting risk aversion among market participants. As shown in the chart below, stocks perform poorly in environments of inverted yield curves. Housing on the other hand has not demonstrated a statistically significant relationship between the slope of the yield curve and returns.
Residential real estate is the largest asset class in the world, and is an invaluable hedge asset for investors with inflation-exposed liabilities. Home Ownership Investments are equity investments in individual homes made alongside the owner—they provide an efficient and scalable way to access a diversified housing portfolio. Unlike other inflation hedges, such as TIPS, the return potential of these investments is in line with many institutional investors’ nominal and real return objectives.
An LDI approach to investing necessitates looking at a pension’s assets exclusively from the lens of how they fare relative to the scope, size, and nature of a plan’s liabilities. Given the risk exposures of a typical pension plan, a residential real estate investment that is akin to a home ownership investment could be a reasonable and prudent addition to a typical asset mix.
In this Home Analytics series, we will develop a toolbox of statistical methods to help analyze the home as a financial asset. We begin by estimating expected risk, returns, and correlation to other asset classes. Later, we will explore applications of our estimates as they related to the financial decisions of households, investors and the public sector.
The “optimal” investment portfolio for an individual will be dependent on a multitude of factors, such as the person’s age, salary, liquidity needs, specific financial goals, and risk tolerance. These unique, individual circumstances should dictate the asset allocation that will create an effective long-term plan for personal wealth management.
Real estate investment opportunities that reduce the potential for fees to chip away at returns should be considered as an attractive method to avoid the risk that fees and costs associated with maintaining assets erode returns (fees such as leasing fees, maintenance/repair, property taxes, vacancies etc.).
Can a price be put on the pleasure of enjoying a mild winter’s day? To answer this question, we turned to residential real estate prices, as a measure of how much people were willing to pay to live in a sunnier location.
Residential real estate equity is one of the largest asset classes in the United States and is a significant proportion of the average household’s net worth. We study how diversified real estate indices lead to a dramatic understatement of the median homeowner’s portfolio risk (by a factor of 4-5x). Finally, we explore the value of an investable and diversified residential real estate index from the perspective of an institutional investor.
With over $71 trillion USD in AUM, institutional investment is a core driver of the global economy. Institutional entities have the common objective of generating cash flows capable of fulfilling future obligations. These obligations fluctuate with respect to economic factors such as interest rates, inflation, and unemployment rates. The compounding nature of investment returns means that significantly more capital is required to fulfill a short-term obligation versus a longer term one.