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Because this post is coming from a real estate developer, it may come across as a bit self-serving. But I have focused the last 7 years of my life on this exact principle and have done very well applying it, and I feel I would be remiss to not share with you a well articulated article.
Over the weekend, in the NY Times, there was this article.
The topic is the difference between the stock market and the housing market. As I am sure you have heard many people are scared that housing will turn south (including our own Sacramento Bee).
I am not going to get into why I feel very strongly that this is not the case but every day I make substantial investments dependent on the theory in this article.
So I encourage you to read it and, when you are done, come back here and comment on your thoughts.
I want to hear what you have to say.
Levi
7 responses so far ↓
1 wburg // Mar 20, 2007 at 12:54 pm
As someone who is also trying to sell property, I’m kind of encouraged by the assessment, and it matches what I have heard from real estate agents: since people live in housing, the demand is a lot less elastic than the market for speculative stock. However, the purchase price of a home is still driven by market forces, not what the seller hopes it will sell for, or how much the owner loves the house. Most real estate agents aren’t honest enough to mention that, since most people are not eager to hear it.
2 Lulu // Mar 20, 2007 at 11:54 pm
I agree houses are different than other things we invest in for profit.
It is concerning to see so many homes some just barely a year old on the market. With the kinds of financing they have it’s not a wonder.
I bought my home in 91. I was very stern about buying only what would allow me to have a home but still allow other aspects of a good life to be had. I was in it for the long run. I kept the house during a critical reduction in force at work. Through paying for a divorce (not mine) and family members coming and going for a few years. And lastly a stint in a different city about 600 miles away. The house remained the constant the anchor. There were difficult times. I can’t imagine playing it risky with my home.
3 Levi // Mar 21, 2007 at 12:32 pm
Lulu,
Perfect example of why real estate will never have the volatality of the stock market.
Bill, I think you are right that Realtors have a jaded view of housing and often push the market places it should not go. I often try and tink of ways that the industry could move away from the currents Real estate agent system. I suspect its about 10 years away and will be largely web driven.
4 Jeff // Mar 21, 2007 at 11:30 pm
Levi - This article mentions some important points regarding home ownership and OPM, but equally important are two fundamental issues; (1) supply and demand - as more humans enter into any ecosystem, the demand for an increased supply of safe and secure dwellings also increases, and (2) location, location, location - the increased cost of gas and increase in length of commute time to work are strong motivators to locate homes in the urban core. Jeff
5 llsan // Mar 22, 2007 at 2:36 am
It makes sense that residential real estate would be less volatile than traditional financial markets because home owners are willing to ‘wait out’ down turns, or they may not be interested in selling period because they want to live there.
6 Carl // Mar 23, 2007 at 12:57 pm
Levi,
It appears to me that the housing market has already gone south. The home across the street from me sold for $418,000 in October 2005. Five houses down, the exact same model built at the same time with similar amenities has been languishing on the market at $334,000 for months. That’s an enormous 20 percent price drop in a year and a half.
During that time, we found out that we’re at greater flood risk than we thought, so that likely had a negative influence. Still, a 20 percent drop is a borderline crash in my book.
I still think housing is a good long-term investment, but things have been pretty bad in the short term.
Carl
7 Levi // Mar 24, 2007 at 6:16 pm
Agreed. The market has gone south.
But there are still major differences that are often not taken to account when looking at housing vs. stocks as places to invest.
The stock market can and often does drop as much as 3-8% on one trading day several times each year. While real estate does travel both ways its not the same as stocks in that you cannot know day to day the value of your home and if you were going to sell it you cannot simply log on to your computer and hit sell.
Those differences make the markets dissimilar in values but there is another that is I believe the most important. If you buy stocks you use your money if you buy a house you use almost all OPM (other peoples money) Not that you are not going to pay it back… But 10,000 in real estate buys you access to 100,000 worth of value that can if you buy smart increase where 10,000 in stocks gets you well… 10,000 in stock value that can increase or decrease.
I know that alot of people make alot of money on the stock market.
For me the feeling of being able to stand outside, look both ways down the road and just feel out what a property is like, that feeling has no substitute. I have never no matter how much I try been able to get that secure feeling that what I bought is good from a stock.
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