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Minyan Mailbag: The Real Estate Market Vs. the Stock Market

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But maybe Fil and Minyan Scott are not that far apart.

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Fil,

I believe that "I could be wrong" is the correct answer. There seems to be some hostility in your response from "At the core." The Real Estate market changed in 2002 and is still increasing in value. The R/E market is played no different than the stock market. When you say the value of R/E should be this price or that price based on what you perceive why, when or where, has a wrongness to it. You play what is handed to you and you play to win (long term or short term). The Fed is why R/E has increased and will continue to do so until they stop printing money to finance the economy, or Fannie Mae (FNM) goes bust, or long term interest rates increase enough to slow the growth, or immigration stops, or we stop making babies, or jobs dry up. If rates go up much, Fannie will go bust.

Here is a test: How many people in your household (owned a home) 50 yrs ago? How many homes does that household from the 50s own today with all their offspring. Mine was a family of 5 in one home, today that equates to 16 people and 14 homes.

R/E is a local market, not a world market like the stock market. If there are 70,000 people that move in the DC area then the price of R/E will soar, simple supply and demand. This does not affect my area which is a very good market but is 20 less in value than the national average.

All of your points were valid but my points and others need to be included in the scenario. Change is fun and, the earlier it is embraced, the more fun. Will there be people left holding the bag at some point, sure, just like in your business.

Minyan Scott

Hi Scott – I am not sure we disagree as much as you think. I've highlighted some of your remarks...

"The Fed is why R/E has increased and will continue to do so until they stop printing money to finance the economy or Fannie Mae goes bust." Once we agree on this, we agree pretty much on the whole story. The real estate market mania since 2002 has been a by-product of the stock market collapse (as is often the case). The fuel behind the real estate market mania has been the printing of fiat money.

"The R/E market is played no different that the stock market." I agree. I thought back in 2000 that the stock market ultimately would collapse (I did not know when of course or I'd be on an island right now). In fact, I am quite convinced the stock market is not even half way done with the secular bear move. Unfortunately, the real estate market has yet to begin (or may have just started) the collapse. By the time both are done it's plenty reasonable to think that current times will be seen as a long lost mirage. . . and I mean a "real long and real lost" mirage.

"R/E is a local market not the world market like the stock market." Yes and No. Yes the R/E market is local, but the problem is that there are more "local" bubbles than not, and that's where most of the money has gone. No, the R/E related debt market is not local. In fact, there is a fair chance that some loner in the mountains of Montana is the proud owner of real estate debt if he simply owns a money market account with MBS' in it.

"You play what is handed to you and you play to win." I say in my piece that I don't see anything wrong in speculation (that's what I do for a living after all) as long as people accept that some people will be "left holding the bag at some point, just like in your business [the stock market]." Two things make me cringe: 1) the idea that R/E never goes down, as the teletubbies spoon feed the public. Ask someone who bought commercial or residential real estate in 1988-89 (after the Fed lowered rates in response to '87 crash (wink, wink)) and let's see if in 1992 they still thought R/E was a sure thing. Not to mention the Japan episode, where "land scarcity" had people mortgaging themselves to their eyeballs (which is still not quite as much as the American speculator, but a good effort nonetheless); 2. Not many people "accepted" being left holding the bag when the Naz blew up: are current real estate speculators ready to accept foreclosure?


Where we differ:


"The R/E market changed in 2002 and is still increasing in value." I am not sure if you are suggesting that "this time is different" for R/E. If you are, than clearly we are on different pages. IMHO: in speculation nothing ever changes.

"How many people in your household (owned a home) 50 yrs ago? How many homes does that household from the 50s own today with all their off-spring. Mine was a family of 5 in one home, today that equates to 16 people and 14 homes. . .. If there are 70,000 people that move in the DC area then the price of R/E will soar, simple supply and demand. This does not affect my area which is a very good market but is 20 less in value than the national average."

I don't believe there is any data suggesting that demographics are behind the mania we are seeing. Considering that the total population is not growing much - if at all - demographics alone may be favorable, but don't explain all the homes sold over the last 3 years. The number of homeowners among the population with income above the median has only risen 1% to about 85% (which is basically as high as it can get). This means that all the other homes were sold as "second homes" or for pure speculation. The type of mortgage products that have boomed over the last 3 years, suggest more the latter (speculation), than the former (second homes).

"Change is fun and the earlier it is embraced the more fun." I speculate for a living. I love what I do, and have a great time doing it: it's my profession and, by extension, my passion. I would not have traded what I was doing for anything else, even during periods during which I've gotten my ass handed to me on a dirty platter, and the only objective for me was "survival". But those periods were not fun. They were intense, and I loved the intensity and the challenge, but not fun. How many newly minted real estate "investors" out there do you think have the passion to stare at a margin call (i.e. foreclosure) and say to themselves "I may be an inch from going broke, but man I love the intensity"?

"There seems to be some hostility in your response." No hostility at all toward real estate. I'm the first in three generations straying – in part – away from real estate. I owe the privilege of what I am doing in no small part to the money that my family has made – and lost - in real estate. 50% of my family's net worth is still in commercial real estate. But, for full disclosure, that's down from 90% just two months ago. Even my "real estate perma-bull" father concluded that what's going on out there is just too scary.

"I believe that 'I could be wrong' is the correct answer" You could be right (though maybe we should circle back in a couple of years ). In the meantime, I am comfortable that even if I am wrong, if the Big Guy upstairs does not have different plans, my risk profile is such that I'll probably be here to play another day. How many self-described real estate "investors" do you think we will meet at cocktail parties, IF I happen to be right?


Thanks for the feedback – that's what the 'Ville is all about. Stay in touch, Fil

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