Returning

So, it has been nearly one-year to the day since I last posted. And, what a year it has been! Since my last post "Housing Hooplah", many people have experienced first hand how over exuberance can hurt. And, hurt bad it has. Examples range from the woman who can't retire because she can't sell her house to a real estate client of mine who went bankrupt (sometimes, it's too little, too late). I won't delve into the plethora of statistics describing the overall credit crunch or housing market crash. There has been enough out there. For an idea see this HousingPANIC.

The interesting thing is that many people want to blame others for the situation. While lenders, developers, real estate agents, etc. are partly to blame I can't help to ask "haven't you learned your lesson yet?" Of course, there will always be people who blame the president. Politics aside, I am a firm believer that our actions are imbedded in pyschological tendencies we all have. Sure, everyone says that our main motivators are greed and fear (which we see all the time), but it is much deeper than that. There is a deep-seeded money psychology that allows people to follow the herd, make irrational and oftentimes uneducated decisions, and fail to follow time-tested financial techniques. A sign of unhealthy financial standards is then to BLAME others for what ultimately was one's personal choice and decision. It's about time we reevaluate the psychology behind our actions and take personal responsibility for OUR decisions rather than blace blame, wait for a government bailout, and wonder if we learned our lessons. Do you play the victim or are you educating and learning by these challenging times? Markets of all kinds ebb and flow, markets correct to a more natural equalibrium, and fads come and go. How do you choose to react?

Housing Hooplah

For the last couple of years I have been experiencing "deja vu all over again". Am I the only one that has seen the eerie similarities between the stock market of the late 90's and the most recent housing market? Does anyone remember the term "irrational exuberance?" and how dangerous it can be to get caught up in market trends?

I didn't think I needed to remind people, but in the late 90's people were so confident they could make quick, easy money in the stock market that they were buying stocks with little to no earnings, little research, and in on or two sectors alone. And, we all know what happened. People paid the price and paid it dearly. In fact, we experienced one of the largest losses in personal wealth in history soon after that.

Isn't this the same as what we have been seeing in the real estate market? How many people do you know that have changed their career to that industry, abandoned prudent investing philosophies to strike it rich in the real estate market, or simply think that making money in real estate is the best and only way? Real estate has an allure, but in fact real estate has not performed as well as stocks over the long-term and there are many risks of which people are either unaware or choose to minimize. Luckily, I am not alone in seeing this trend.

Robert Shiller, a finance and economics professor at Yale, sees the same trends in housing prices (which is no real surprise given the nation-wide softening) and warns that getting rich on real estate is usually overrated. If you recall, Mr. Shiller wrote the book called, you guessed it, "Irrational Exuberance", which forecasted the end of the 90's stock bubble.

In a recent Money Magazine interview, Mr. Shiller points to a few interesting facts: from 1890 to 1990 the return on real estate was just about zero after inflation, since 1986 its been about 6% or 3% after inflation, and that over investing in real estate is a recipe for disaster. At this point he has about 60% of his portfolio in stocks, he is very light on real estate, and continues to have a lot of holdings outside of the United States.

Money Magazine also ran a similar story on real estate versus stocks. They compared performance, costs, diversification, and effort needed to expand as an investor. In their analysis, stocks won. The only place that real estate wins is in the area of leverage. Most people know that it is the power of other peoples money or leverage that makes real estate investing powerful. However, the data suggests that this added leverage is oftentimes consumed by taxes, closing and purchasing costs, maintenance and other associated expenses. In all, people we continue to run after one trend or another. The smartest, however will avoid the hooplah or the "irrational exuberance" in any market. It's your choice.