Should Your House be considered a Real Estate Investment?

The June Money magazine has an article about how the average American has 27% of their assets in their own home. Most investors would be unwilling to have one quarter of their assets in a single stock.

Most investors try to reduce their risk by diversifying their asset allocation by investing in at least stocks and bonds. Wealthier investors may have investments in stocks, bonds, real estate, and possibly commodities or other asset classes.

The article has two suggestions as to how you could reduce the risk incurred by having such a high asset allocation due to owning a home.

Laurence Siegel, director of investment policy research at the Ford Foundation, says one way to diversify is to buy real estate investment trusts (REIT) in other areas of the country. The idea behind this is that if the value of your home goes down, the value of the other real estate may maintain it's value. Siegel also thinks that REITs make more sense early in a mortgage, since your bank has more ownership in your house than you do.

Stanford finance professor Steven Grenadier and economics consultant Peter Bernstein say owning your home is enough real estate risk. They say that you can hedge your risk by buying bonds. They point out that bonds tend to go up when home values go down.

Hans Nordby, Property & Portfolio Research strategist, says that as long as you are planning on living in your house, as opposed to selling it, you shouldn't consider your house as an investment. He considers a primary residense as a form of consumption. You get a return from you house by living in it, not from tapping it for cash.