September 1, 2004
Real Estate Reality Check
Traditionally, African Americans have valued real estate as the best investment around, but according to the authors of the Ariel/Schwab Black Investor Survey, it may not be the best investment vehicle for retirement.
This year’s survey revealed that 61% of blacks and 51% of whites saw real estate as the best investment overall. This marks the first time the majority of both black and white investors polled in the survey preferred real estate over all other investments. With interest rates beginning to rise again, there is concern that African Americans in particular may be shying away from other investments in favor of real estate at a time when property values may begin to decline.
“[Real estate] is cyclical, just like the stock market, so the danger is that [African Americans] will get too optimistic and forget that it is an asset class,” says Carla Foster, vice president and director of the African American Investor Services program at Charles Schwab. Foster stresses that real estate “may be a part of an overall investment portfolio, but it shouldn’t be the only part.”
Mellody Hobson, president of Ariel Capital Management L.L.C. points out that one reason investors have shifted toward real estate is because of the phenomenal gains it has made over the last few years. The National Association of Realtors expects home sales to break last year’s record of 6.1 million, and they project price increases of 5.4%. Over the last three years, the average home has appreciated, but Hobson cautions that this growth has been fueled by historically low mortgage loan rates and very aggressive mortgage products that offer 0% down or even more than 100% of the home’s value to pay for repairs and upgrades. Those who couldn’t afford homes before took advantage of these programs, and if interest rates spike too high, those homeowners may find themselves with more mortgage than they can afford.
“The idea that small ticks in interest rates will impact your mortgage payment and ultimately your monthly budget is something that has concerned me for quite a long time,” Hobson says.
Hobson also notes that the emphasis African Americans put on real estate may be misplaced because “typically, we don’t experience the same increases in real estate value as our white counterparts in other communities. That is problematic.”
Both Foster and Hobson stress that you don’t want to be too dependent on any one investment for your retirement. Diversification is the key.
“[We want] people to understand that [real estate] is one piece of an overall wealth-building strategy,” says Hobson. “It has boom and bust cycles just like the stock market.”