The Wall Street Journal published an article called “The Truth About Money” that struck me as extremely relevant for affluent homeowners, and real estate investors.
The total income of the top 1%—or those earning more than $343,000 in 2009—fell by more than 30% from 2007, according to the most recent Internal Revenue Service data. By contrast, the average income of the bottom 90% fell less than 3% during the same period.
Citing a study by Jonathan A. Parker and Annette Vissing-Jorgensen of Northwestern University they that found that “the beta of the top 1% nearly quadrupled between 1982 and 2007 to 2.39. The top 0.01% had a beta of 3.96, making even the riskiest tech stocks look safe by comparison.”
In plain language, this means that the wealthiest Americans are experiencing a 4% fall in their net worth for every 1% drop in the stock market! There goes the old notion that “the rich stay rich!”
In July I published an article on “How Stocks Effect Manhattan Beach Home Prices,” in which I showed that Manhattan Beach home values (an affluent beach city in Southern California) are 33.3% correlated to the S&P 500, compared to 18.3% for the rest of Los Angeles, and 4.3% for the national market.
Given exceedingly high correlations in real estate and stock market values for wealthy neighborhoods, residents in these places should adjust their other financial holdings accordingly to account for elevated risk to local real estate exposure.
Investment commentators all too often tout wealth building strategies that include elevated risk levels inadequately considered. In these times of global market uncertainty, it is more important than ever to incorporate rigorous risk management in everything you do. Past successes should not lead to future hubris!