Monday, March 2, 2009

Real Estate as an Investment-let's be reasonable

You'd never expect to read a blog than be referred to another blog. But this individual did such a thorough job elaborating on just the real estate sector and he's full of good information. http://realestaterecord.blogspot.com/

If anyone doesn't know what's wrong with investing in real estate over stocks or anything else, think about it this way. Your losses are extended to the people in the neighborhood. If you used an ARM loan to speculate, you put your neighbor with a legit mortgage on his primary residence at a higher risk of foreclosure. If you speculated with ARM loans, you pushed the price of homes out of reach for the median home owners.

I hope that people were waiting out the bubble before they bought in to provide shelter for their families. Unfortunately the banking industry didn't agree which is why i didn't support the bailout.

This post was going to be titled "stock markets vs. real estate markets" but the world is an infinate casino where investors can trade timeshares and bet on the weather. Therefore, real estate can't be compared to one group of financial instruments.

There were several reasons to be skeptical of the recent housing bubble, and just the idea of "investing" in real estate (vs. owning your own home).
















1. Your real estate broker is not a financial advisor. They're not qualified as financial advisors in any reputable institution unless they hold a CFP or a CFA and hold the title of "financial advisor". Even traders are not 'financial advisors' unless they were specifically trained to do so.

2. What was your real estate broker's incentive on your gains on that investment? See #1. 'Commission based salaries based directly with market prices that they're sold at' are not always a guarentee that the professional is working in your best interest. When fit hits the shan, you can't sue them for bad advice, although there might be a case for market manipuation. Pump and Dump scams (aka. "Ponzi scheme") are punishable by the SEC in the markets and still a widely used method of manipulating asset prices, including the real estate market.

3. What was the volatility index? The Case Shilling thing was an epic fail. The Consumer Price Index (CPI) left out the the cost of housing during the real estate bubble for a reason. The Cost of Living Index (not the CPI) does include the cost for housing and it sits at 100 at a fair price. Anything above that would indicate gouging, or in this case volatility. In 2005, the cost of living index floated over 200 in California. The national average was around 180.



















4. Unlike regulated investments in the stock market, there is no guarenteed liquidity in Real Estate unless the owner foreclosed or through any insurance payout in the event of a disaster.
In the stock market, because of SEC regulation your stocks will always retain some form of liquidity, they're backed by ownership in the company. The derivative markets were illiquid because they were not backed with bonds like they were supposed to be. They were not regulated by the SEC or government backed organization.

The nice thing about the markets is that your gains or losses will always be limited to the markets; outside of a margin call, retirement tax penalties or a small penalties. Your credit cannot be ruined because you lost on any investment. At the very worst a high level option trade gone bad can send the firms after your assets but that's the worst possible scenario.

Real Estate was considered a safe haven for funds after the dot com bust. Unfortunately, the high volatility caused non-specuators to lose assets and homes.

As a treat, I've found some articles in recent past defending the bubble. Since 2003 after the dot com bubble burst, the cost of real estate artificially went up.

During this crisis, we can look back and see exactly what they were doing (talking up the price of real estate).























"...The national economy is improving and unemployment is very low. Orange County just reported a 2.7 percent unemployment rate, and jobs are distributed over many industries resulting in very little exposure to massive layoffs. "



"...Interest rates are still excellent and not expected to go much over 6.5 percent in the next year. "


Other fun articles:
February 18, 2004: 4:07 PM EST By Jon Birger, MONEY Magazine
"...The good news for most homeowners is that houses and stocks are altogether different animals. In the stock market, a blowup at Enron or Lucent can create a downdraft for the entire market. In real estate, what happens in L.A. or Boston has little bearing on other parts of the country."
FALSE!!! I have never been this disappointed in the mainstream media. When you lose on a particular stock, you eat that loss alone. Non-investors won't be affected. The price of goods that company sells won't be affected by your loss.
When you foreclose on real estate, the property values in that area go down and the neighborhood mortgage borrowers are risking foreclosure. Remember, the stock market contains your losses in the market. You only lose what you put in. Not your credit, your family's shelter. In Real Estate, non-investors aka. PRIMARY owners were adversely affected by the gouging and the volatility.
Bloomberg did better.
John Wasik
"...``There is no bubble here,'' says Michael Beam, an agent- broker with Coldwell Banker Hunt Kennedy, a real estate agency in New York. ``There's low inventory and high demand. Buyers are out in force and I'm seeing bids of $50,000 over the asking price on certain properties.'' "
Southland home sales up, prices down; foreclosures now half the market
October 20, 2008
"La Jolla, CA---Southern California home sales shot up by an unprecedented 65 percent last month from the dismal, record lows of a year ago, when a credit crunch slammed the brakes on home financing. September sales also posted a rare gain over August as price cuts lured more buyers. Foreclosure resales rose to half of all transactions."
(note: this news just came out in October of 2008. The new purchases have dropped in value since then)
Former President Bush and Federal Reserve Chairman own this problem.

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