Monday, April 25, 2005

Real Estate A "No Brainer"

This Yahoo site tells us, "Small-biz entrepreneurs are discovering that they can (invest directly in real estate) through their so-called solo 401(k) plans. The tactic has been fueled by real estate's hot returns in recent years."

A good idea? Not according to the CSMonitor. "Richard Thaler has made a career of cataloguing the blunders of amateur investors. Mr. Thaler ticks off the mistakes: People tend to be overconfident in their ability to pick stocks. They're unwilling to admit a mistake and make matters worse by holding on to losers. They put more money in the market as it nears its peak. When a market is rising, they think it will keep rising."

"Don't get us started on real estate. Economists across America warn that housing prices are a bubble about to go splat. But the Univ. of Michigan recently found a growing confidence in the promise of ever-rising property values. According to its consumer survey, 22 percent of households think that real estate is now a great investment, double the share of 15 months earlier."

There is even a tax advantage to borrowing part of the property in the 401k. "'Borrowing speeds your growth using someone else's money,' Anderson says. 'It's a no-brainer.'"


At 4:01 PM, Blogger deb said...

"If you invest in high-quality, high-demand areas, nothing changes," he added. "Prices won't go down significantly even in a downturn."

I guess from '89-95 investors didn't know that high-quality, high-demand areas don't go down. That must be why Beverly Hills dropped almost 50%.

At 4:07 PM, Anonymous nostradamus said...

Smart money out, dumb money in. That's how the system works. That's what happened in the stock market. Lots of "smart" VC firms made zillions bringing a bunch of cats and dogs public. They got their money out as the sheeple poured in.

Here in SF, we're seeing the same thing with commercial real estate. Lots of big private players (like the billionaire Shorensteins) are selling large. Who are the buyers? Pension plans and REITs.

The sheeple get sheared yet again. Who loses? The folks who count on those pensions and who own stock in those REITs. Funny money pours into Wall Street darling (REITs), so the REITs bid up commercial property all over U.S. The private players (like the VCs in the '90s) unload and the publicly-invested get stuck holding the bag.

As before, so again.

At 4:20 PM, Anonymous downtowner said...

That guy Anderson doesn't know how right he is: buying real estate at today's prices is a no-brainer.

Nothing wrong with debt-financing an investment, particularly if you time the purchase correctly. But another word for debt-financing is LEVERAGE. By putting only 10% down, you can double your money if the asset gains 10% in value. But if it goes DOWN 10%, you lose everything. That's leverage for you.

Most folks buying real estate today don't understand how leverage works on the downside. They only see the upside.

At 4:20 PM, Blogger Ben Jones said...

Thaks for the SF commercial insight. Please keep us updated.

At 4:24 PM, Anonymous dailyreckoningfan said...

The inimitable Bill Bonner of

Most people seem to believe things that couldn't possibly be true. They think houses go up faster than the rate of inflation - all the time. They think they can spend more money than they earn - indefinitely. They think America can take more from the rest of the world than it gives - for as long as it wants.

And because they believe these things, they do things that an older, more experienced person would find reckless and irresponsible. During the great Tech Bubble, Wall Street investors bought stocks trading at 200 times earnings...or stocks that had no earnings at all! They knew they were doing something extraordinary; but they thought they were doing something very smart. "It's a new era," they said...and thought if they didn't get on board that train now, they were going to be left behind.

Now, it's the housing market that draws in young, inexperienced players.

Peter Schiff comments:

"One 'expert' consulted [by the New York Times] commented that in the past, real estate investors expected annual rental returns of 8% to 10%, and that such a 'historical perspective' is actually a negative in today's market, as it results in experienced investors passing on properties that investors with 'fresh prospective' routinely buy. 'They're not being foolish; they're looking at it differently than people who have been in the market for a long time.' In other words, this time it's different, a new era. I've seen this movie before, and I know how it ends. Remember all the novice stock market day-traders ridiculing Warren Buffet for his failure to grasp the new reality."

People buy property now as they bought tech stocks five years ago - without any regard for earnings. It's all a greater fool game - betting that someone will come along who is an even bigger numbskull than you are. The game continues for a very long long that people come to see it as eternal. And the more confidence they have in it...the more reasons they invent why it should go on. Most experts cite "demographic factors" - meaning, that there are supposed to be many more people who need a roof over their heads. According to the theory, there are so many new immigrants and baby boomer children that the homebuilders can't keep up with them. Prices will rise. Why the homebuilders can't build enough houses to keep up with the demand is a matter of debate.

How the new buyers will be able to pay higher prices - when incomes are falling - is not clear. Nor has anyone bothered to explain why prices didn't rise when the baby boomers themselves grew up. And there is always the outside chance that these new households may rent. Rental yields are falling; relatively, rents are cheap.

Markets make opinions. When prices rise, people find all the reasons in the world why they should continue. You'll recall, one of the major reasons given for why stock prices had to continue rising in 1999 was "demographic factors." There were supposed to be so many people putting so much money into stocks - for their retirements. The logic was supposedly irrefutable: The Baby Boomers must save money. They had no choice but to put it into stocks. Stocks had to go up.

Then, too, the reasoning was perfect - as long as stocks went up. But then something happened; they went down. For the last five years, the Baby Boomers have felt little desire to buy stocks.

But the "demographic factors" argument is still perfectly serviceable for the housing market. It will work fine - until something happens and houses go down in price.

At 5:48 PM, Anonymous Anonymous said...

FWIW, this month's Money magazine is about "how to get rich", and the girl on the cover got rich by essentially flipping real estate. Yes, they are actually recommending this, at this late date.

I think it's time to cancel the subscription. It's become a little too oriented to "buyer's guides" that feature lots of high priced toys and junk.

At 6:30 PM, Blogger Sunny said...

"Economists across America warn that housing prices are a bubble about to go splat. But the Univ. of Michigan recently found a growing confidence in the promise of ever-rising property values. According to its consumer survey, 22 percent of households think that real estate is now a great investment, double the share of 15 months earlier."

This is a good example of how real estate market information flows. The people investing in real estate today will be reading this blog's archives three years from now and saying, "That is exactly what I think!"

The internet has really upped the ante for staying on top of market movements and trends. You gotta move quicker than before to beat the herd. I like nostradamus' comments "smart money out, dumb money in". So what's next for smart money?

At 7:22 PM, Anonymous Anonymous said...

When do you have a bubble ? When there are no brains left. A NO BRAINER. It's a bubble.

At 7:27 PM, Anonymous Anonymous said...

I was surprised at the Money article myself. Alas, they sell what people want to read and believe.

View from D.C. - People running around like chickens with their heads cut off trying to get into properties. Same thing going on here as in S.F. and L.A. Overbidding, multi-offers, adjustables and i/o's. Same tune different location. Real estate here looks about 50% overvalued.

At 7:56 PM, Anonymous Anonymous said...

It's happening everywhere, yet the Federal Reserve won't admit that it's a national bubble.

They say "There may be concerns in the overheated coastal areas". It's not just on the coasts it's happening in every corner of this country.

The phenomenon that is happening should make them reconsider their claim that "Real Estate is Local". Maybe it was in the past but not anymore.

They need to prop up the dollar to stop our real estate from being so attractive to foreigners, due to the devaluation of the U.S. Dollar. Otherwise the only people that will be able to afford real estate in the U.S. will be the foreigners.


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