Have You Invested Too Much in Real Estate?

By Mark Jewell, AP Personal Finance Writer

BOSTON (AP) — Are you overexposed to real estate?

It's a question worth asking if you're among the legions of homebuyers contributing to a turnaround in home sales.

That's not to say that real estate prices are overvalued. There's still a long road to recovery.

A government index of home prices, released Thursday, declined 0.2% in February, the third straight monthly drop. Nationally, the median sales price in March of $170,700, was nearly unchanged from a year earlier, according to the National Association of Realtors.

Real estate can play an important role in your overall investment strategy whether you're a homeowner or a renter. That's because real estate investments tend to move up and down at different speeds, and at different times. Such diversification helps to limit the overall volatility of your portfolio.

HOW TO INVEST: There are three major ways investors can own a stake in real estate: direct ownership, real estate mutual funds, and real estate investment trusts.

Owning a home is important because it's a key component of household net worth. Home equity, the value of the home minus the mortgage amount, generally constitutes the largest share of a household's net worth. It's advisable not to view your primary residence as an investment in the strictest sense.

"A home is a totally undiversified and concentrated asset, and I wouldn't consider it in deciding the allocation in an investment portfolio," says Larry Swedroe, research director at Buckingham Asset Management, a St. Louis-based financial advisory firm.

If you're staying in your home long-term, a spike or dip in its value may not amount to much by the time you're ready to sell. Keep in mind that a home isn't liquid and its purchase is driven by many quality-of-life factors beyond a return on investment. What's more, you can no longer count on the double-digit annual price increases of a few years ago, when homes became ATMs for taking out home equity lines of credit.

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