Why Real Estate Is a Levered Investment (w/ Danielle DiMartino-Booth & Chris Cole)


I wasn’t surprised about most of what
you wrote but I was I was intrigued about how you view real estate as an
asset class it’s got the highest return but yeah so real estate is real estates
quite interesting as an asset class because I think most people don’t really
think of it as it is a levered sector growth asset and your average person I
think your average retiree maybe not the institutions but the average retiree
they would never go lever their stock portfolio five times but you own a home
and that is a levered investment mm-hmm that’s not saying it’s a bad investment
I’m not saying that but most people don’t look at it in that in that light
so in the same way that you structure that one should structure trend and
counter trend assets to balance the Hawkins serpent the idea of including
real estate in one’s thinking about one’s personal portfolio I think is
really important because oftentimes your job is driven by the economic growth
cycle your home is driven by the economic growth cycle and then your
levering that exposure to the economic growth cycle and then you’re also adding
stock exposure on to that so the average retiree with some or the average kind of
working individual with with a mortgage mm-hmm has tremendous exposure to the
secular growth cycle levered in a and there’s you know there’s an
extraordinary percentage of baby boomers with mortgages yes yeah and the rest of
their portfolios in an index fund and very few people think about this and you
know the the concepts at the end of the day that that somehow that will be
insulated I mean stocks dropped 86 percent in the
Great Depression and real estate dropped the same to the same degree now in Prior
cycles when interest rates were at 19 percent and we’re able to be lowered
that created a dynamic where real estate performed somewhat like a bond every
single time that rates went down it increased the affordability right for
people to buy bigger homes so that provided a cushion for real estate
mm-hmm well when rates are at the zero bound several bad things begin to happen
first of all your 60/40 portfolio can struggle in the sense that your bonds
are not getting as much benefit right but on top of that your whole price is
not going to get as much benefit if rates can’t be lowered at the margin at
the margin yeah so I don’t think people realize this you know rates where they
are today for us to get the same benefit on a bond portfolio on a long-duration
bond portfolio or the kind of same pickup in mortgages that we got after Oh
8 the Fed would have to lower interest rates to negative 1.5% don’t say
negative all right to get the same benefit as people got right based on
where they lowered in 2008 I’m never gonna say that’s not feasible anymore
because god knows what is feasible now but I will say there are major social
ramifications if they pursue a course like that

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