Wednesday, June 06, 2007

'It's a Lot of Work for No Gain'

From USA Today:

Many investors feel like running away from homes

Buying real estate seemed a no-brainer five years ago. Cheap loans were easy to get. Home prices were soaring. Stocks were dead money.

How things have changed.

For-sale signs are sitting ignored in some cities. Interest rates on exotic loans are doubling. Insurance premiums and property taxes are skyrocketing. Wannabe real estate tycoons stuck with properties they can't sell have been turned into landlords, forced to fix toilets and take tenant calls in the middle of the night. Many are "under water" — owing more on the mortgage than they could get by selling.

Meanwhile, stock investors have been celebrating again as broad market indexes march to new highs. And that is prompting some real estate investors to make the switch back to stocks.
...
The migration from real estate to stocks is part of the natural swings investors go from loving an investment class to hating it, says Robert Shiller, a Yale professor who studies market movements. Just as investors saw housing as a haven from the bear market for stocks in 2002, they see stocks as their best bet now as some housing markets go from bad to ugly, he says.

[Ken] Winans [president of investment research firm Winans International] and others think the sloshing of money from real estate into stocks is one of the factors fueling the stock market's recovery to record levels. "Inventories (of unsold homes) are up while coinciding with volumes and prices of stocks going up," he says. "Surprising there aren't more people connecting the dots."
...
[W]hile real estate can be lucrative, it often comes with headaches and hidden costs. Those may have been tolerable when home prices were soaring, but now that prices have stabilized or even started to drop, the annoyances are deal killers.

Some investors want to get out but fear they're so far in the hole already that they don't want to take the loss. Janice Burnham, an eBay employee who lives in San Francisco and was included in USA TODAY's 2002 cover story, got fed up with stocks and bought a Silicon Valley home in 2002 and an investment property in Folsom, Calif., near Sacramento two years ago. She paid $353,000 for the investment property.

"Everyone else was making money," she says. "I figured this was the way to make money. I've changed my opinion on that," she says.

Now she figures she would have trouble selling the Folsom home for $320,000, a loss she's trying to avoid by renting the property. But that's not going well, either, because she spends money for upkeep and struggles to find tenants.

"It's a lot of work for no gain," she says.

24 comments:

anon1137 said...

"Inventories (of unsold homes) are up while coinciding with volumes and prices of stocks going up," he says. "Surprising there aren't more people connecting the dots."

There's no connection between these dots. A house with a for sale sign out front, with a gigantic loan and an asking price that's 20% too high doesn't cause stock prices to go up (except maybe the stocks of companies that specialize in foreclosures and short sales). Besides, even if these investor-owned homes did sell, there wouldn't be anything left over from the deal to invest in the stock market - maybe the investor would even have to sell some stocks to cover the loss on the house. I think most investors (and lenders, borrowers with ARMs, and hedge funds that bought MBS's) are like Ms. Burnham, sitting around with huge paper losses, biting their nails and waiting for a miracle.

Patient Renter said...

"There's no connection between these dots."

That's exactly what I was thinking.

As for the "investor" in the article, does that mean we're at 2002 price levels now but just don't know it yet?

smf said...

There is a perfect connection here. When the stock market crashed in 2000, investment money started to flow into the 'next best thing', housing.

This is why we saw so much money going into housing 'investments' (that turned out to be speculation).

Now that housing is obviously not an investment in this market, those with investment money (remember that these can be insurance companies, retirement funds, etc., not just people) are putting their money to work someplace.

And this happens to now be the stock market, where the certainty of a return is a little more assured.

norcaljeff said...

Where's Sippin? He suggested a while back that when the stock market dipped a few percentage points in Feb/March, RE was going to bounce back, but it never did. The stock market is returning 20% annually so that's where investor dollars are going and will go until the market takes a long term dump.

Patient Renter said...

"Now that housing is obviously not an investment in this market, those with investment money (remember that these can be insurance companies, retirement funds, etc., not just people) are putting their money to work someplace."

We've had a bull stock market in stocks almost all throughout the housing boom, and on through today. I don't see where there was a shift in investing since the stock market was booming, and simply still is.

smf said...

"I don't see where there was a shift in investing since the stock market was booming, and simply still is."

Do we see a stock bubble beginning?

(Remember that for those serious and informed investors, the housing boom stopped 2 years ago already)

Diggin Deeper said...

Liquidity, liquidity, liquidity...the world is awash in dollars and investors are buying stocks because the market appears undervalued. What many fail to account for is that stocks are quoted in dollars that have consistently fallen in value for six out of the last seven years. The market isn't rising all that much, its the dollar falling to new lows that makes stock shares rise to meet fair market value. Couple currency deflation with hard asset inflation and you probably have to strip two thirds to three quarters of the gains you get in the market today, just to break even...Imho, if you're not making at least 15% in the market, you're probably losing money from a purchasing power standpoint...

Diggin Deeper said...

"Do we see a stock bubble beginning?"

Probably a full blown bubble with all the hedge fund money and carry trade leveraging going on right now. When you can't leverage "no money down" real estate into a profit anymore, somebody's figured out another way...

norcaljeff said...

PR, there was a meltdown for a while in the stock market. The S&P500 lost half its value between 2000-2002. But it's regained all that value back just recently. But we can expect stocks to out perform real estate in the near future, and longer. RE historically since 1900 has only gained 3% annually v. 7% for the stock market.

smf said...

"RE historically since 1900 has only gained 3% annually v. 7% for the stock market"

But you have to remember that even in the stock market you have to work at keeping your overall return to a decent level.

Many big companies that existed 50 years ago are no longer in business. Their stock did not go up 7%/year, their stock is worthless now.

You have to keep working on your stock investments, moving them around as conditions change. You can't leave your stocks standing still.

I have bought and sold several stocks according to the current conditions, and have sold plenty of times close to the high. And when I got greedy, ended up riding several all the way to the bottom.

Hmmmm. Sounds a lot like housing, doesn't it?

Sippn said...

Yea, but you can live in your stock portfolio while you invest in it.


OK stock sharks, stocks (djia) are just over 10% hghr than they were 7 years ago, a little over 1% per year. Great nvestmentif you got in 4 years ago, lousy if 7.

Is stock investment chasing fundamental performance? or is it just a popularity contest as was much real estate?

Diggin Deeper said...

10 yr Bond yields pushing over 5%. Not good for either the stock market or the real estate market. Neither market can absorb higher rates in the short term. With rates rising all over the world to combat hard asset inflation, the US (Fed)is one of the only hold outs in raising rates. So the bond market will take care of things on its own. Mortgage rates will be rising and that will further dampen an already sick Sacto market...

Diggin Deeper said...
This comment has been removed by the author.
Diggin Deeper said...

Talked with my stock broker today about rising bond rates and real estate. He relayed a story about a guy he knows that runs a mortgage company in southern CA. In April of this year his company put out approximately 100 NOD's on late mortgages. In May that figure jumped up over 1000. His comment was that what we're seeing not the the real story, and its much worse than we're being lead to believe

paranoid renter said...

>>>
its much worse than we're being lead to believe
>>>

I totally agree with this. I think folks at the top are trying to hide the extent of the damage as much as possible in the hope that something else (perhaps corporate spending) will come in and save the economy. However, it looks like corporate spending is slowing as well.

It looks like we may be headed for a big time recession. I'm less worried about house prices, more worried about my job...and I'm not in any construction-related activity.

I think the slow down is starting. This summer stocks will go down (as they usually do) except that they won't be bouncing back again.

Sittin' Out This One said...

Does any one remember 1053 Smith Way, Folsom. The Realtor add said best offer over $350,000 won the deal. It was a New Century buy back loan?

It is now relisted in MLS at $500,000. I guess the reciever for New Century was not of the same opinion about dumping the property!

MLS # 70033067. There is no word in the listing about Bank Owned. The lender has a $588,000 loan (2nd is $147,000), financed a year ago June 19th. 3098 SF two story, split garage.

In this market things are often not what they seem and rarely what they are advertised (like an auction, for example, that is really a shill bidders marketing gimmick)

Patient Renter said...

Sittn,

Yes I remember that property and was waiting to hear more on it. A couple of people knew something smelled fishy with that one, but last we knew, we were assuming a sale was pending.

AgentBubble said...

Regarding the 1053 Smith Way House...In the agent only comments, it reads "The accepted offer was withdrawn! Property now back on Market at higher price. Still a good deal."

It's listed as a short sale. The bank hasn't taken it back yet. I checked the county records, and it looks like a NOD was filed then cancelled, but I can't be certain because I'm only able to see the name of the owner, not the address.

norcaljeff said...

SMF, put it in an S&P500 index fund and never look at it again. It's not that difficult to do. Btw, those companies you said that go out of business, well the S&P factors that in and the bad companies get pushed out and the better companies get added to the index.

Sittin' Out This One said...

A/B thanks for the info. Evidently the builders are not the only ones with cancellation problems. However, that Realtor needs to learn a little marketing strategy. "...put back on the market at a higher price" WTF? is that?

Sippn said...

Yes, SMF had you invested in the s&P 500 in 2000, you would be almost exactly where you were then, after a brief 30% dip..... but thats not the whole story.

smf said...

My whole point was that investing (at least most of the time) is not something that should be static. Which means that if you bought a house or a stock, you can't simply believe that after x number of years you will get y returns.

But that is how housing investment had been pushed. And that is simply not how the markets work.

norcaljeff said...

Sippin, you add no value to these discussions. From the start of the stock market, it has consistently performed better than housing. It's called long term investing. Let's see how much money you make in RE in 7 years????? But you're a realtor, so I know you're biased and won't give a true answer.
SMF, read the writings of Warren Buffet and John Bogel, guys who are much smarter than us, and esp Sippin, made money in the market buying and/or advocating index funds.

norcaljeff said...

I know Sippin doesn't like facts to get in the way of his biased RE opinions so here's an article from Forbes. Money and the WSJ also have similar articles and it shows what I was talking about, long term views:
It is--in the short term. U.S. real estate sale prices increased more than 56% from the beginning of 1999 to the end of 2004, as tracked by the Office of Federal Housing Enterprise Oversight, part of the U.S. Department of Housing and Urban Development. The S&P 500 index dipped nearly 6% during that same period. But if you take a longer view--say 25 years--you'll find that the S&P 500 has actually stomped the real estate market, from Boston to Detroit to Dallas. From the start of 1980 to the end of 2004, home sale prices increased 247%. A pretty sweet deal, it would seem. Over the same period, however, the S&P 500 shot up more than 1,000%.