Wednesday, April 02, 2008

Time to Jump Back Into Stocks and Real-Estate?

As I have previously written, I have been gradually putting more money into the stock market over the past several months. Now, however, I am getting a feeling that the bad news has finally been priced into the stock market. Even Bernanke is finally talking about a recession, and even the clueless National Association of Realtors is finally admitting that housing is in decline and that recovery may be a ways off. With all this negative talk it seems to me like the stock market may actually be ready to start a gradual bounce-back over the next several months.

Don't get me wrong. I expect volatility to continue for some time to come, as yesterday's dramatic gain in the markets clearly demonstrated. However, it is possible that the long term trend may be about to turn positive. Since I am not a believer in hunch investing or in market timing, I will continue my disciplined and deliberate approach of regularly investing the same amount of money on the 15th day of every calendar month, regardless of what the market is doing.

What is new for me is the sense that real estate may actually be turning into a reasonable investment. And, even though I have previously written at length in praise of renting vs. owning a house, I am now, for the first time ever, toying with the idea of buying a house. Even here, in the most expensive part of the San-Francisco Bay Area, prices seem to have mitigated somewhat and the number of houses on the market has increased substantially. It used to be that the asking price was a mere starting point for a furious bidding war. This seems to be a thing of the past, at least for now. My wife and I have noticed houses staying on the market longer, and a larger number of open houses in our neighborhood are held not just on Sundays but on Saturdays as well. Even more intriguing is the fact that a house on our street was recently sold below its asking price. Am I still living in Northern California? Is this a sign of the end of days? (repent!)

For now, prices in this area have not declined siginificantly, but I have a hunch that we may be seeing some declines in the near future. Our current lease will be up for renewal in October. Would this be a good time to jump into the real estate market? Should I abandon my long held beliefs in diversification and in the long term supremacy of the stock market and sink our hard earned savings into bricks and mortar? I don't know, but for the first time in a very, very long time, I am starting to think that this may be a sane option. What do you think? I am interested in hearing from everyone, but especially folks from the Bay Area.


Randy Reynaldo said...

I stumbled across your site, and read your earlier post with interest about renting versus home ownership. I'm a newbie to investing/preparing for my retirement.

I have family who live in the bay area, and live in a similarly expensive housing market in Southern California. We bought our home (a condo actually) in 2002, at the height of the market. I did wonder whether I'd ever make my money back whenever I sold it, little knowing the market would (fortunately for us) go on a few more years. We too rented a house at a very affordable rate for the area for many years before buying our house. Regardless, we weren't interested in "flipping" it and planned to be here for a long time, which of course would add to the value/appreciation at the same time we paid down our mortgage. We have a fixed interest rate (even the recent dips in rates have not dropped as low as what we have now), and I've never touched the equity.

As I said, my financial sense in those days was pretty much nil, but the one argument I made to my wife who wasn't so sure why I was so anxious to buy was that I knew our income would not keep pace with the housing market and we would be priced out if we waited. While on paper I know houses in the area have lost their value, we're still way ahead. But like stocks, you should be okay if you're in it for the long haul. My wife is so happy now that I pushed so hard on this. We had a one-year old at the time and now have two children.

I understand your arguments, but in my mind if someone is serious about a diversified portfolio, a home should be considered one such investment in your holdings. Hopefully, it's not solely about the money, but also investing prudently and broadly. And though many people at your other post talked about the costs, many of these costs, including the property tax and mortgage interest, are deductible. (You mentioned you were hit with an AMT, could this have brought your income down further?) For some people who've not properly prepared, there house IS their retirement nest egg. I've learned now that should not be the case, but certainly for now it's the cornerstone of my net worth. But at least I've now learned to diversify beyond that as well with our investment/retirement accounts. But we are very happy to have a home that is in our name. But we have learned that it shouldn't be your only asset. All the money we're paying towards the house is an investment in our equity in the home--which cannot be said for rent. Anyway, that's my view!

Shadox said...

Thanks for the long and toughtful comment. In my opinion, a house, by its very nature is not a diversified investment. How can it be? There is only one of it. It is tied to a specific location, and in all likelihood - unless you are one of the very wealthy - your house represents the vast majority of your assets. In addition, historically, house prices have yielded lackluster returns - the last few years not withstanding.

Having said all this - I never said that one should not buy a house. On the contrary. I recognize people's deep seated need to own the place where they live. I too feel that desire. All I am saying is that you should not delude yourself that your house is a smart financial move. If you are going to buy something, there is much to be said for spending your money on a house rather than on a depreciating asset, BUT if you are going to invest you are probably better off with a well balanced portfolio of stocks, bonds, and yes, real estate. However, why settle for one undiversified real estate asset in your portfolio? Invest in a REIT and own a small diversified share in a large number of assets. Those are my thought in any case.