Melvin Feller Looks at Real Estate versus Stocks
Melvin Feller Looks at Real Estate versus Stocks
Melvin Feller Business Ministries Group in Burkburnett and Dallas Texas and Lawton Oklahoma. Our mission is to call and equip a generation of Christian entrepreneurs to do business as ministry. We provide workshops and resources that help companies discover how to do business God’s way. When the heart of a business is service rather than self it can be transformed into a fruitful business ministry earning a profit and being of service to the community and their customers. Melvin Feller is currently pursuing another graduate degree in business organizations.
The stock market can be a tricky thing at times. One minute it is up, next minute, it is down. For much of the first half of 2018, the stock market was in what is known as a bull market — where investors are buying up stocks, and companies are seeing their prices skyrocket.
In the last few months, though, that has begun to change. October was especially rough for the stock market, and while a nice chunk of corporations reported higher-than-expected earnings in mid-October, the markets are still in decline.
By mid-November, the stock markets took another hit. The Dow Jones Industrial Average dropped 400 points on Monday, November 19, while the Nasdaq dropped 3%. Tech giants and earnings powerhouses Amazon, Facebook, Netflix and Apple all took a hit recently as well.
Financial firm Morgan Stanley says the bull market is already over, according to a CNN Business report, and 40% of the S&P 500 is already in a bear market. Stocks are falling, and more bad news is on the horizon, experts warn.
Perceptive investors and ultra-wealthy investors are heeding the call to sell off stocks and shift their money elsewhere. So where is that money going? According to a CNBC report, ultra-wealthy investors are putting their money in real estate and private equity.
Michael Sonnenfeldt, the founder of investment club Tiger 21, said real estate is accounting for 28% of its members’ allocations. Tiger 21’s more than 600 members are entrepreneurs from every industry, with about $60 billion in total assets.
As Sonnenfeldt said during an appearance on CNBC’s “Power Lunch” recently: “You want to be defensive, but in a low-risk environment you still have to take risk. So you are going to take risk where you have expertise: owning buildings, building small businesses.”
Some may question why real estate would be a good investment in a down market. The initial hesitation comes in large part from what happened during the last large bear market almost 10 years ago. During the financial crisis from 2007 to 2012, when the S&P 500 stock index fell 57%, residential real estate took a huge hit, too, losing 18%. While comparatively real estate was less of a loss than the S&P 500 stocks, down 18% is hardly a good investment.
Why, then, are the ultra-wealthy turning to real estate in today’s bear market when they don’t have confidence in stocks? It is because, according to a USA Today report, the Great Recession was the exception and not the rule when it comes to down markets and the effect on real estate.
Mark Hulbert, the founder of the Hulbert Financial Digest, wrote the report for USA Today, and looked back at the last 19 bear markets since 1952. What he found was that other than from 2007 and 2009, the real estate market showed increases in all but one bear market. The one bear market that did not show increases fell by just 0.4%.
Hulbert’s findings were based on the Case-Shiller index. The brightest part of the report for real estate investors is that even including the Great Recession, the Case-Shiller index showed an annualized average increase of 4.6% for all stock bear markets since 1950.
There is even more good news, according to Hulbert’s report. He quotes Gray Cardiff, the editor of the Sound Advice newsletter, who said that relative to stocks, real estate is undervalued today. When compared strictly to stocks, Cardiff says real estate has rarely been cheaper, and he compared data all the way back to 1896.
Cardiff says the last time the ratio of real estate-to-stock value was higher than today was during the Internet bubble. In the bear market that followed, the S&P 500 lost almost 50%, while the Case-Shiller home price index rose more than 20%.
Ultra-wealthy investors do not always end up being right when they make their decisions on where to place their money. However, one thing this group of people often does is base their investment decisions on sound research and historical data. The historical success of real estate in a down market is what is driving these investors’ decisions to shift their money away from what they, and experts, believe is a bear stock market and into real estate and private equity. As Sonnenfeldt said, even in environments that are low risk, investors still need to take a risk to make money.
Real estate investing is not reserved for just the ultra-wealthy, though. There are entry points at various levels, and you do not have to have a net worth north of $1 billion to get into the market.
Now may be the perfect time to jump into real estate investing. Interest rates are continuing to rise, which often results in fewer buyers on the market. These higher interest rates result in larger monthly mortgage payments, which often means that what one could afford a year ago is drastically different than what they can afford today. For patient investors, though, this could be a good thing.
As interest rates rise and buyers fall, so, too, do the price of homes. Homeowners who need to sell may be forced to lower the asking price of their homes due to the fact that there aren’t as many buyers around. This provides an opportunity to get even more value on a property than an investor could before.
During times of higher interest rates, more people turn to the rental market to bide their time, hoping that interest rates come back down again, or that they are able to put aside more money for a larger down payment later. The housing market has already begun to slow, since it is what is considered a “credit-sensitive” part of the economy. The same downturns are being seen in similar segments of the economy such as autos.
This slowing of the market actually provides real estate investors a terrific opportunity to capitalize by purchasing a home at a price that would have been under market value less than a year ago, and then earn monthly income by renting the home.
So what is the difference between being underwater on a mortgage and underwater on a stock? Is it that “experts” will tell you to hold the stock in hopes of it going up in value and then explain that those with homes worth less than their mortgages should not feel bad about breaking their mortgages and defaulting?
I think “Buy and Hold” for stocks is one of the all-time great marketing scams. Ignore it. Always.
“Buy and Hold” for your house is a mantra you should always live by. The difference?
You can live in your house. You get utility from your house. You may get a deduction for interest paid on your tax bill. You can develop a positive emotional attachment to a house.
A share of stock….well you can…you can look up the price anytime you want if you think that’s fun. There is no utility of a share of stock beyond its financial value. The value of a house is that it’s your home.
The fact that you may be underwater in your mortgage is of no relevance if you can make the payments.
If you can make the payments on your mortgage, it shouldn’t matter if your house is worth 10pct of your mortgage. If you can make the payments, make them.
My last house, I remember being scared watching as my rate on my Adjustable Rate Mortgage went up and up as I watched the value of my house go down. For 2 years my rate went up, my house value went down. Fortunately, I liked living there. I wasn’t building any equity, in fact, I was negative, but I was going to have to pay to live somewhere. On top of everything, my credit was bad enough; I did not want to make it any worse. In fact, I knew that if I did not make the payments on my house, my chances of ever owning a house again were none and none. Therefore, I kept paying the note every month. In spite of the financial pain.
Then a funny thing happened. Interest rates started to go down. I did not even know it until I got my annual notice saying that my mortgage payment would go down. The value of my house was not going up, but for the next several years, my payments went down. It took years, but I actually built equity in the house.
Which is exactly the point. Buy and hold works when it comes to the HOME you LIVE IN. Turning in the keys because you have negative equity is a fool’s game. If you do, YOU WILL NEVER OWN A HOUSE. You will be a renter FOREVER.
Investments should primarily be made based upon your financial goals, your stage-in-life savings that you have, and your risk-orientation and so on. However, at the core of it all, you are looking for the best return for the amount of risk that you are willing to tolerate. The stock market has many flavors for you, e.g. growth stocks that are stocks that may rise rapidly but carry a degree of risk, income stocks, which are those that throw out dividends and so on.
Your adviser will ask you to divide your holdings based upon your risk profile. You make money when you sell, or from dividends and there are no tax offsets other than prior losses. To get a capital gains treatment you have to hold that stock for over a year, else you are taxed at ordinary rates. Uncle Sam rules you. If you are after passive income, welcome to what may become the new world of dividend taxation at 43%. Uncle Sam Rocks.
Now consider a real estate investment. You can depreciate the house, not the land, over 27.5 years, thereby offsetting part of your taxes. Your investment income is sheltered and is taxed at ordinary income rates and not the potentially high dividend rates for stock, making this a much better after-tax passive income source. Finally, when you sell, you can roll your profits into another property in a 1031 exchange and avoid paying taxes on your gains.
Therefore, the message is clear. Stop occupying Wall Street and consider buying a piece of Main Street. Own a real asset and not Enron, and one that comes with great tax benefits.
Your home has far more value than its mark to market price because you can live in it. Do whatever you can to stick it out. It will pay off for you in the end.
Melvin Feller Business Consultants Ministries Group in Texas and Oklahoma. Melvin Feller founded Melvin Feller Business Consultants Group Ministries in the 1970s to help individuals and organizations achieve their specific Victory. Victory as defined by the individual or organization are achieving strategic objectives, exceeding goals, getting results or desired outcomes. He has extensive experience assisting businesses achieve top and bottom line results. He has broad practical experience creating WINNERS in many organizations and industries. He has hands-on experience in executive leadership, operations, logistics, sales, program management, organizational development, training, and customer service. He has coached teams to achieve results in strategic planning, business development, organizational design, sales, and customer response and business process improvement. He has prepared and presented many workshops nationally and internationally.
