How To Hedge Against Risk

During periods of economic uncertainty, it is important to consult the past to look for what has performed relatively well during periods of economic downturn. Long-term investments, such as real estate, are one of the avenues investors have turned to during economic downturns because of the asset class’s historical resiliency. 

Investors tend to look to real estate investment as an asset class that hedges poor or worsening economic conditions. The reason is that real estate, especially residential, is a long-term investment that can be bought at a discounted price during poor market conditions and has historically rebounded faster than other asset classes. During the 2008 financial crisis, home prices declined by an average of 33%, according to the Case-Shiller Home Price Index. Home prices quickly rebounded, and by 2013 had returned to their pre-recession levels. In contrast, peak prices from the S&P 500 Index had dropped off by 56% from their peak during the 2008 financial crisis and took longer to rebound to pre-crisis levels. 

Residential real estate investment generates income from two sources: rents received and equity gained from an appreciation in property value over time. The rents received create a passive and predictable income stream that, according to the Joint Center for Housing Studies of Harvard University, has generally outpaced inflation over time. The National Council of Real Estate Investment Fiduciaries (NCREIF) found that the average annualized return for residential estate investment in the U.S. from 1990 to 2020 was 9.68%, outpacing the S&P 500 during that same time frame. 

Over the past several years, the housing market has been heavily on the side of sellers, but recent trends and data indicate the balance of power is shifting toward buyers. Housing prices are beginning to decline with a recent Redfin Report finding, “In February 2023, U.S. home prices were down 1.1% compared to last year, selling for a median price of $386,527. On average, the number of homes sold was down 22.1% year over year, and there were 325,911 homes sold in February this year, down 418,390 sold in February last year.”

As it relates to demand, the same Redfin Report found that buyer demand is dropping significantly. “In February 2023, 23.8% of homes in the U.S. sold below list price, down 23.7% points year over year. There were only 13.9% of homes that had price drops, up from 5% of homes in February last year.” 

The reason fewer homes are being bought above list price and an increase in homes having their prices dropped is that market competition has dropped. In a competitive market, a home may have multiple offers, which drives up the price. In a less competitive market, offers on houses decline so the price may remain as listed or drop to attract more buyers.

Rising interest rates coupled with stubborn inflation are squeezing primary-residence homebuyers and individual mom-and-pop single-family home investors out of the market. But high-profile investors, private real estate investment firms and institutional buyers are stepping in to fill the void. The U.S. Census Bureau found that the percentage of rented single-family homes has increased from 29.6% in 2010 to 35.6% in 2020. This trend is expected to increase for the foreseeable future the number of first-time homebuyers in the market continues to decline. 

The high cost to acquire a property, along with the often high cost to maintain and manage the property, creates a financial barrier that restricts access to the asset class. But through the recent creation of online fractional home investment through platforms such as Arrived Homes, access to real estate is possible for everyday investors. 

Fractional real estate allows investors to add real estate to their portfolios without a down payment or closing costs. For as little as $100, investors can purchase shares of single-family homes and benefit from the passive income stream from rents received and appreciation in property value over time. 

Because of the relative insulation from adverse market conditions, low correlation to other asset classes and the ability to generate passive and predictable income, fractional real estate investment makes sense for prospective investors looking for alternatives during what may be a rocky financial road ahead. 

With new properties offered on Arrived Homes weekly, prospective investors can stay up to date through Benzinga.