I do know something about the stock market, and would like to add to some earlier comments.

Tomaski says that real estate can be levered, but not stocks. You most certainly can purchase stocks on margin, but not to the same extent that you can a primary residence. I don’t know any lenders who are going to loan 90% on investment properties. And remember that leverage is a double edged sword. It is great in an up market, but really hurts in a down market.

In Tomaski’s example of a $10,000 increase in value equating to a 100% return, I take issue. First, we all know that values mean nothing; the only time you realize an actual gain is when you sell. So using the example, let’s say the owner owned the property for one year. He would have paid roughly 6% on 90,000, or $5,400 in mortgage interest. He would then pay realtor fees of 6% on the $110,000 sale price, equating to $6,600. Excluding other ancillary expenses in selling a home, the investor actually lost $2,000.

True, you may be able to purchase real estate from a motivated seller at a good price. Likewise, you can purchase stocks when the market panics and drops, therefore buying at a price lower than what was very recently deemed “market”.

Tomaski says that value can be added by the owner via renovations (which by the way require labor and expenditure). I would argue that I can own a stock and do nothing but stay apprised of the company and its value will increase; requiring little effort and no expenditure.

Tomaski’s notion that you can take profit out or real estate without selling is erroneous. There is no profit until you sell. Certainly, you can refinance based on a higher valuation, but you are merely levering your investment even more. If the home ultimately sells for less than what you originally paid, you are still on the hook to repay the loan, even if it is an amount greater than the price of the real estate.

Traders monitor the stock market daily. A fundamental investor owns a diversified portfolio of stocks with price targets established. Therefore, there is no need to monitor the market daily.

Diversification is something much more easily attained in stocks than in real estate due to lower cost and the difficulty of owning/managing multiple pieces of real estate in different geographies.

Finally, the liquidity of stocks is far superior. There is always a market for the stocks to be sold immediately. The sale of real estate can take a considerable amount of time, effort, and expense to accomplish.

Real Estate relative to the cost/value of other things will phall mightily in the coming decade. On a nominal basis you may be OK but when RE is expressed in such things as gallons of gas or dozens of eggs you will be well behind the curve in the coming inflation.

I was recently in the vally and was greatly impressed by the number of short sales being offered. Such headlines as “Get it before the bank does” really surprised me on many of the offerings. This is a big change from my phirst visit in 2005. Another thing that surprises me is the number of homes for sale that are vacant and the number of properties for rent.

The calculus of RE values are further confused by the rental value to purchase price of homes out there. My sister sold her 3/2 ranch in Gilbert for 295K and the buyer rented it out after several vacant months for 1050 a month. Those numbers WILL NOT work.

Now, all that said, if I were a home owner in the valley and I were to sell I would activly look to buy back in providing I had stable employment that would keep me local. Why? I think that moving is a pain and looking at some of the fools who recently bought into the market I can imagine being “put out” several times by the banksters who will eventually forclose on thousands and thousands of home.

W/ a RE investmentyou are highly levered. More so than you really could ever be with a stock. So a 5% increase in RE compared w/ 12% stock. RE wins hands down in this case. But the same can be said for the downside too.

Just like not all stocks are the same investment, all RE is not the same investment. You can’t make broad generalizations, because any given person is going to have a different experience depending on how and what they buy

As a commercial RE investor, and dare I admit, the holder of an AZ RE license, my humble prognosis for our local area (phx) in terms of residential single family homes is:

Option # 1 – Median home prices for most zip codes goes to 3x (or less) of median income, as normal. (I think they will actually dip below 3x for a time as lenders & emotional buyers overreact to the fallout)

Option # 2 – The people who have control over the money & it’s supply will keep the price high, while reducing the value in relationship to other goods & services… probably by rampant inflation of the US Dollar.

Oh… and commercial property will settle back to a CAP rate of 9-10, where it used to average.

People won’t keep buying strip malls & office buildings on speculation of future values and future rent increases, either.

If institutional investors keep buying at the current low returns, it’s for one reason only:
They can’t find anywhere better or even safe to “store” the money. Cap rates of 3-6 don’t even make sense for any other reason.

The cheap, easy, “subprime lending” in commercial is following the cheap, easy, “subprime lending” in residential over the cliff right now.

CMBS are drying up fast, and if the gov’t doesn’t try to “help out,” and leaves it alone,

My .02 worth… of course, with the gov’t, the elections, the Fed, the Central Banks, emotional debtors, and fiat currency, etc…
anything is possible.

Benefits of RE over Stocks:

1)purchase can be leveraged. Most people borrow 80%-90% while putting little money down. If you put $10,000 down on a $100,000 house and the value goes up 10% to $110,000 you have gotten a 100% return on you money.

2)price can be negotiated with seller. Stocks are sold at market price. Motivated sellers will sell RE considerably below market.

3)Value can be increased by owner. One can renovate property to increase value.

4)Profit can be taken out without selling. You can refinance, take out tax free money and still keep the appreciating assett.

5)Tax benefits can be taken from mortgage deduction on primary residence to required depreciation deductions on investment property. Also $250K single, $500K married capital gains exemption. Also, IRS 1031 exchange.

6)Daily monitoring of market not necessary. Values move slowly

7)Benefit of use. Property can never go to zero (like Enron). One can live in it.

I’d argue that RE is one of the best investments you can make. That is why most of the super wealthy have made their wealth or keep their wealth in real estate.

I’m not sure what to make of this: “40-50% drop!? You people are nuts! Real estate is not like the stock market”

RE values do go up and down, like stocks. They’ve dropped more than 80% in the past (see California after the gold rush), like stocks. The only differences I see are that RE is less liquid (and thus, prices change more slowly), RE is less prone to substantial corrections (we just had an unprecedented upward correction, leading to today’s situation), and RE is a physical asset that provides value beyond just an investment.

In fact, I’d argue that RE is one of the worst investments you can make, as it barely beats inflation and requires money for upkeep. As a place to live, though, it’s very good

Why did you sell your house? Is your landlord a slumlord? There are government agencies you can complain to. I treat my tenants like partners or clients. If they are happy, they are not going to vacate. Just good business. About wages, taxes, and insurance, they do not always follow a linear direct variation to real estate. I can’t stand Jay Butler. He’s another “intellectual” with questionable real world experience. I enjoy this site because I believe Twist is a brilliant researcher and commentator. Many of her predictions have come true. But she does not exhibit the emotional anger, fear, or envy that some readers do. I just want to present another side to all this negativity. I hope things go better for you.

You may be right. It may be awhile. But I’m only 40 and have reached financial independence thanks to real estate. Luckily, we were “investors” before it was a Phoenix fad.

stevec-

Are not small homes in Encanto now going for $750K+ on this day? I think you made out O.K. Would have made out even better if you’d have leveraged a couple of those $30,000 homes. I’m more concerned about the loss of the immigrant population than declining revenues. People must be able to move here (Phoenix Area).

I live in Encanto Park. In the eighties homes in my neighborhood rose to about $150,000. When the crash came, many homes sold in the $30,000 range. In other words, they dropped 80%. Don’t ever think the bottom can’t drop out of housing. On top of all this, we are about to come into a major recession. Did you read the article about dropping sale tax and income tax revenues in Arizona? Check out the Republic. Those are real statistics.

Be careful- you could be waiting awhile.

40-50% drop!? You people are nuts! Real estate is not like the stock market. Let’s see: in the Phoenix area the median income is about $35,000 per year. 3x that would be $105,000 per year – not much house unless you live in the ghetto. By the way, thank you to all you renters who are making the payements on my houses while I wait for real estate to double AGAIN!

No one knows anyting for sure. I do know this. If lending returns to standard loans, no one will be able to buy a home at current prices. Also, we just were in a bubble and it has popped. Like every other bubble, a crash follows. Look at the NASDAQ. In 2000 it peaked at 5048. It closed Friday, FIVE YEARS LATER, at 2596. It was the same thing. People became irrational in buying stocks and it crashed.

Typically, homes are no more than 3x income. Taking the average income in Phx and the median home price, you get around 6x income (at the peak). That points to a 50% correction in either home prices, or income levels.

90,000 – 100,000 1

100,000 2

> 200,000 6

The gross number of homes on the market only dropped by about 400 at the end of the month. This is the time when most closings take place. It would be safe to say there will be a record number of homes available in a week or two as inventory rebuilds.

Here is the most significant stuff. I watch certain areas as I want to buy in one of them. They are Cave Creek, Desert Hills, Waddell/Litchfield Park/Buckeye, Rio Verde and South Mountain. Here are the pending sales for the past week:

200,000 6

> 300,000 3

> 400,000 9

> 500,000 0

> 600,000 1

> 700,000 1

> 800,000 1

Pretty sad, huh? Multiply those numbers times 4 to get monthly sales. There are thousands and thousands of expensive homes sitting there. As you can see, the cheapies are selling because that\’s where people can qualify. My theory is that soon the more expensive homes will be forced to start coming down. That in turn will drive the cheapies down further. Remember homes got so expensive due to funky financing which is no longer available.

Homes will need to come down another 40 – 50% to get in stride with the nedian incomes of the neighborhoods.