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2019 Idaho Real Estate Blog

Which is a safer investment a home or stocks? Main Meridian Homes for Sale
As the stock market tanks today, I am glad I own more real estate than stocks these days!

Even though the housing prices in Meridian and around the country have taken a beating in the past two years, I am still greatful that I am more invested in real estate than in the stock market.

Here are a few things to remember about great reasons why homes can be better than stock:

  • You can live in your home regardless of its current value but what do you do with 1,000 shares of stock?
  • The average home in America appreciates 3.8% a year over the long term and this is typically on leveraged money!  In other words, if you bought a home with 3% down, and it goes up 3.8% you actually made 1.26 times your investment the first year even before tax savings! (Buy a home for $200,000 @ 3% down = an investment of $6,000; at the end of the year assuming the 3.8% long term return it would be worth $207,600).  I recognize you have to make monthly payments, but as long as it is in line with monthly rent these wash out.
  • Even if the market depreciates over the long term and the property drops 50%, after your mortgage is paid off, you own the home instead of never owning your rental!  If your stock drops 50% you still have the same number of shares but you can't go retreive a piece of the company or their assets for your personal use.
  • You can have a realistic opinion of the current value and market with your home, but how would you have been able to predict the demise of WAMU, World Savings, Dime, Bear Sterns, etc., etc., etc.
  • You can get a room mate or renters to help with payments when need be.  If you turn your home into a rental, you actually get to depreciate it even though historically the home apprecaites (for once a good double standard from the IRS).

As I watch the stock market go wildly down, a little up, then down again today and watch companies like WAMU sell their assets then bankrupt I realize another benefit of owning your own home.  If you hit such hard times, you can at least claim the Homestead Exemption to protect the equity of your home from involuntary liens.  

If you make money on the appreciation of your home, it can be tax free money via IRS code section 1034 for your primary residence or defer the gain via section 1031 on investment property.   I don't know of a way to not pay immediate tax on gains from stocks.  

Jim Paulson, CRS, EPRO, GRI, EcoBroker - Owner/Broker Progressive Realty Corporation

www.Progressive-Realty.info

 
Posted by Jim Paulson at 9/29/2008 6:27:00 PM
Comments (10)
Re:Which is a safer investment a home or stocks?
Good post- and hey I did call Wamu

While I could disagree with parts of the post, I wanted to address only 1..

your example of 3% down

IF YOU CAN ONLY SAVE 3% DOWN YOU ARE NOT READY TO BUY A HOME! Where have the standards gone! No wonder so many banks are going under.

You father, his father , and his father likely put down at least 20% andlikely had 1 10 or even 5 year loan. Why have Americans become such losers...debt junkies.

I have been short the stocks of most of these banks for the simple reason that they give money out exactly like the example above.

Posted by on 9/29/2008 2:40 PM
Re:Which is a safer investment a home or stocks?
I am glad I didn't use my 100% down finance option (believe it or not they still exist for some niche products).

The reason this programs exist is that our government is trying to increase home ownership percentages in our country and have programs like FHA that insure the spread between the 3% and the 20% down.

Increased homeownership is a good thing because common sense implies that people take care of something better if they own it instead of rent it. If you own your home and the neighbor brings down your property value by neglecting theirs, you are more apt to take action. If drug dealers move into the area in a high profile way, homeowners are more apt to try to stop them. In elections, homeowner vote more than renters.

I have helped on investor buy a lot of homes with 100% financing which has made him a lot of money due to the leverage. He is fortunate enough to understand that leverage is a two way street and to treat it with respect however! As long as the return on investment is greater than the capital cost of the investment (providing security of the investment exist), borrowing is OK. Buying a disposible asset (credit card debt, cars, etc.) with leverage is stupidity!

If you buy a fixed asset like a home, you need to look at the potential replacement cost (rent) and when it makes sense, buy it for yourself and for your future instead of for your landlords retirement!
Posted by Jim Paulson on 9/29/2008 3:01 PM
Re:Which is a safer investment a home or stocks?
With the stock market dropping 777 points today (DOW) that takes us back to about the level it was in October 2005. Ironic that is about where I put our house prices. Another irony, 777, a lucky number for those like emdeplam that sold short!
Posted by Jim Paulson on 9/29/2008 5:00 PM
Re:Which is a safer investment a home or stocks?
Jim- Central problem with 3% down.

When you buy you instantly are about 8% underwater...you have to back out the RE fees when you need to sell, plus taxes etc for 1 year. Since you build 0 equity in the first year, I think that is realistic.

Now in a declining market, if ANYTHING happens...job, health, divorce etc... you are already -5% if you sell...given the market may go -5% or -10% you could be down 10 to 15%. THESE PEOPLE WILL WALK AWAY FROM THEIR HOMES. IT IS THE ECONOMICLY INTELLEGENT DECISION.

This lead to foreclosures which further push the market down. This is why 20% down is key. It protects the community.

Jim, everyone of your buyers that you give 0 or 3% down is a high probability foreclosure if the market continues down. This not only harms them, but harms the whole community.

Home ownership is 69% nationwide. It should be historically at 66%. It is probably even higher in Ada county. Home ownership is a great goal, however most buyers of the last 5 years are doing NOTHING MORE THAN RENTING THEIR PLACE FROM THE BANK.

Why did we have a bailout bill? $10,000 dollars per person? See above. Could you find a better use for $10,000 dollars?
www.Fedupusa.org

Posted by on 9/30/2008 1:23 AM
Re:Which is a safer investment a home or stocks?
I agree that if there is any chance that you won't own a home for more than 3 - 4 years, you should probably rent because of the cost to acquire and liquidate your home. This is really not much different than investing in stocks and paying front end or back end loads on your mutual funds or your brokerage fees. Even if you put down 20%, you shouldn't consider buying with a short term hold in mind unless you are going to do something to improve the value enough to offset the cost to resell.

If you were going to rent a home for $1,250 a month and if the same home could be purchased with 3% down with payments of $1,250 a month (or even roughly $1,400 a month due to tax savings) why would you want to through money away in rent and let your landlord enjoy the benefits of homeownership while you try to save more than is required to buy?

Had people saved $20,000 for a down payment in the stock market their investment is already down about 7% in the past two days if they were invested in the DJIA. Most people unfortunately have almost no savings account. The largest investment most people have is their home.

Even though on a 30 year mortgage, very little is paid off in the first five years (I assume that is what you were referring to) there are still two additional benefits: 1) you locked in prices based on your purchase date unlike rentals will increase/decrease with the market and 2) at least you are still making principle payments with a deed of trust as opposed to just throwing your hard earned money down the toilet with rent.

Rent is like an insurance policy. It minimizes your risk; however, there is generally no potential to "profit" on the insured without something negative occurring first!

Also, if we required all the buyers to start putting down 20%, many of the homes would not sell since so few buyers are prepared to put that much down on a home. The decrease in demand would cause prices to fall in a near free fall.

I think a better fix, is to make sure the buyers with limited down payments attend education seminars to learn about budgeting and to make sure underwriting guidelines are adhered to. Many veterans in this country have been able to use their VA benefits to buy homes with $0 down and sometimes even have the seller pay their closing costs for a net $0 investment and their default rate is still incredibly low. One of the keys to that success was that the VA looked at the buyers entire budget on their loan approval and only lent to homeowners, not speculators and investors with that financing.

Real estate is not a "get rich quick" guarantee no matter what people think they learn from late night infomercials. It is a great tool for the long term however
Posted by Jim Paulson on 9/30/2008 2:22 AM
Re:Which is a safer investment a home or stocks?
Just a few comments:

Front end and back end loads on funds- These are tiny % now! The industry left the dark ages and transaction costs are generally less than 1%. This is not ture of Real Estate where the bigger lobby in the world, NAR, has pushed and bribed our gov to make sure alternatives to the ridiculous fees fail. We have made becoming a RE agent a more lucrative profession than a scientist, engineer, teacher etc... and you need a HS degree....great priorities for our country.

People should have 6 months salary in the bank first. Thats CD/money markrt/savings NOT THE STOCK MARKET! The stock market is as much speculation as the housng market of the last 5 years. I hate the 401K/mutual fund industry as much as NAR....corrupt liars that take too much off the top and deliever too little. DOLLAR COST AVERAGING haha... thats the most profitable investor profile for a fund...wonder why they give the advice.

To your comment that 20% down would crack the market! BINGO...it would force it to become AFFORDABLE again. Anything less is just a financial ponzi scheme to keep the bubble inflated.

Defaults...when you are underwater you are much much more likely to default. HERE is my proposal. ANY LENDER LENDING MONEY OR MORTGAGE BROKER MUST HOLD THE LOAN ON THEIR BOOKS FOR 5 YEARS. If there was risk on the lender and not the tax payer this crap would end tomorrow. No one would lend money for 0% or 3% down...it ONLY MAKES BUSINESS SENSE when you can dump the risk on the taxpayer.

Home ownership is wonderful, but I cannot recommend it in this market at this time. It will be time to buy when conservative standards return to the banking system. 20% down 28-32% DTI as has been the LONG HISTORY of home loans. Until that time we remain at red alert for further crash. HUNDREDS of more banks will fail before this is over! The gov will end up ramping our national debt by 20-40 THOUSAND dollars per person, and home prices will continue to fall.

I like the "get rich comment" too. but my take is AMERICANS ARE NOT ENTITLED TO THINGS- HOUSES, TVs, SUVs, European vacations....we MUST rediscover our work ethic and EARN these things thru hard work and savings.
Posted by on 9/30/2008 4:34 AM
Re:Which is a safer investment a home or stocks?
I have no clue where your claims are founded regarding Realtor incomes. I want their jobs! Yes, the top 10% of the agents do make a very excellent living; however many do not. One real estate broker mentioned to me the other day that his research indicated roughly 1,600 Realtors in our local association had sold either no homes or a single home this YEAR!

Ok, if this year is not a good example, read this article: www.realtor.org/archives/feat4july05 which states "the median income of sales associates actually declined about 8 percent to $38,300 from $41,600 in 2002, largely becaue of the influx of new licnesees who typically take years to get up to speed in their earning potential".

I am not sure how you jump to the conclusion "if there was risk on the lender and not the taxpayer this crap would end tomorrow". It is because the risk of the lenders and the fallout it is causing that the taxpayers are impacted. If the lenders weren't at risk, who are we bailing out?

Also, I am curious, if everyone agreed with you and didn't buy real estate, where would you find a rental to live until you decided the pendulum had shifted enough to jump back in again?

I don't think the sky is falling, but I admit it is pretty cloudy and there is thunder on the horizon. As a result, do we stay inside and hide or do we get our rain gear on and go get ready to sing in the rain?
Posted by Jim Paulson on 10/1/2008 4:11 AM
Re:Which is a safer investment a home or stocks?
"the sky is falling"--- yes I have heard that comment here all year as posters have talked about the rebound coming...Trey said we will be in full swing up by this fall--(early this year prediction)... I can be labeled a 'doomer', but if anyone listened to me they would have saved a big loss on a purchase since I first joined here in Fall '07. I just can't recommend the 'It's always a good time to buy" NAR tagline...

Let's examine the situation...
1. Deflation- cash is king as banks and companies WW scramble to find cash. Debt is KILLING people now as even solid companies pay premiums to get cash
2. Financial lock-up...muni market is for all intents closed, commerial paper closed, derivities closed, default swaps (insurance against company failure) are at all time highs
3. Stock market is incredibly overvalued on a forward earnings basis
4. Unemployment is still low but rising
5. Housing is still historically overvalued
...one could go on

This is a time to raise cash and pay down or off any liabilities. Buiyng a house now makes no sense for the vast majority...if you do not have 1 years salary in cash. There are plenty of rentals available...plenty. All of those 0% or 3% down people will be by and large crushed, underwater and many will walk away.

I have told you in advance...
-prices will fall 15-30% (Fall '07)
-banks will fail (NCC, WB, WM, COR, ZION, BS, LEH, MS...) many of my predictions have come true
-stock market will hit DOW 10% interest for it

I have a pretty good track record on anything that I post here... so go ahead buy a house,
1 year from now it will be down at least 5%, the DOW will be significantly lower, Idaho unemployment will be >5%, and USA unemployment will be >8%

"if the lenders weren't at risk who are we bailing out"...the lenders are at risk holding 20% of MBS...the gov now backs the other 80% which will eventually crush our balance sheetand cause interest rates to ramp right into a huge economic slowdown.

I was on a conf call with the Senate last night (listen only) and I have been on the front lines of many aspects of this problem. It is much worse than you are being told. We are not bailing out homeowners or even banks with the $700B...the concern is with the USA itself and our ability to go forward. We have been threatened explicitly by foreign debt holders and primary dealers and the dollar and thus the sovereign power of the USA is directly in balance.

In a best case scenerio we are looking at Trillions of dolars of wealth destruction, much of it hidden in bank balance sheets, bonds, pension funds, money markets, commercial paper etc... The question at this point is how to take the losses and still have a functioning system.

You have been warned. If you have liquid assets (cash) you will have the opportunity of a lifetime to purchase houses, boats, cars at amazing prices in the coming years...if (and I am an optimist) the system survives.

Dismiss me if you will, but this is as wild today as when I pointed a the countries biggest financial institutions in fall of '07 and said bankrupt.
Posted by on 10/1/2008 5:14 AM
Re:Which is a safer investment a home or stocks?
"the sky is falling"--- yes I have heard that comment here all year as posters have talked about the rebound coming...Trey said we will be in full swing up by this fall--(early this year prediction)... I can be labeled a 'doomer', but if anyone listened to me they would have saved a big loss on a purchase since I first joined here in Fall '07. I just can't recommend the 'It's always a good time to buy" NAR tagline...

Let's examine the situation...
1. Deflation- cash is king as banks and companies WW scramble to find cash. Debt is KILLING people now as even solid companies pay premiums to get cash
2. Financial lock-up...muni market is for all intents closed, commerial paper closed, derivities closed, default swaps (insurance against company failure) are at all time highs
3. Stock market is incredibly overvalued on a forward earnings basis
4. Unemployment is still low but rising
5. Housing is still historically overvalued
...one could go on

This is a time to raise cash and pay down or off any liabilities. Buiyng a house now makes no sense for the vast majority...if you do not have 1 years salary in cash. There are plenty of rentals available...plenty. All of those 0% or 3% down people will be by and large crushed, underwater and many will walk away.

I have told you in advance...
-prices will fall 15-30% (Fall '07)
-banks will fail (NCC, WB, WM, COR, ZION, BS, LEH, MS...) many of my predictions have come true
-stock market will hit DOW 10% interest for it

I have a pretty good track record on anything that I post here... so go ahead buy a house,
1 year from now it will be down at least 5%, the DOW will be significantly lower, Idaho unemployment will be >5%, and USA unemployment will be >8%

"if the lenders weren't at risk who are we bailing out"...the lenders are at risk holding 20% of MBS...the gov now backs the other 80% which will eventually crush our balance sheetand cause interest rates to ramp right into a huge economic slowdown.

I was on a conf call with the Senate last night (listen only) and I have been on the front lines of many aspects of this problem. It is much worse than you are being told. We are not bailing out homeowners or even banks with the $700B...the concern is with the USA itself and our ability to go forward. We have been threatened explicitly by foreign debt holders and primary dealers and the dollar and thus the sovereign power of the USA is directly in balance.

In a best case scenerio we are looking at Trillions of dolars of wealth destruction, much of it hidden in bank balance sheets, bonds, pension funds, money markets, commercial paper etc... The question at this point is how to take the losses and still have a functioning system.

You have been warned. If you have liquid assets (cash) you will have the opportunity of a lifetime to purchase houses, boats, cars at amazing prices in the coming years...if (and I am an optimist) the system survives.

Dismiss me if you will, but this is as wild today as when I pointed a the countries biggest financial institutions in fall of '07 and said bankrupt.
Posted by on 10/1/2008 5:25 AM
Re:Which is a safer investment a home or stocks?
emdeplam,

I don't dismiss some of your statements. You are just a lot more risk averse than I am and more of an extremist. To borrow the illustration used by both Palin and Obama, a pig with lipstick is still indeed a pig.

We can talk ourselves into and out of slicing up and eating the pig too. Some cultures / religions allow their followers to go hungry and starve to death while the "pigs" or the "cows" or the ... graze and get fat. In their belief, they are correct. Who am I to say they are wrong while I sit down at McDonalds have enjoy a bacon cheeseburger?
Posted by Jim Paulson on 10/1/2008 4:08 PM
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