Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM Monday, March 28, 2005: There
is an old expression: when the stockmarket hits the front page of all the papers,
you know it's time to sell. So it is with the real estate over the weekend. There
were two main pieces. One came from The New York Times and one from the
Los Angeles Times. They're worth reading in their entirety. In case you're
wondering why stockmarkets have been desultory of late and where all the money
has been gong, here's the answer. As to whether real estate will bust like the
dot-coms (90%+ drops), I'm dubious. But I do see real estate dropping and I do
see some nice bargains available in melee for savvy investors with cash. Cash
remains King. First, The New York Times' piece:
Trading Places: Real Estate Instead of Dot-Coms
By MOTOKO RICH and DAVID LEONHARDT
Americans have started behaving in ways that eerily recall the stock market
obsession of the late 1990's.
Fla., some houses have been bought twice in a single day, an early-21st-century
version of day trading. Buying stocks on margin has morphed into buying homes
with no money down. The over-the-top parties of Internet start-ups have been
replaced by flashy gatherings where developers pitch condos to eager buyers.
ago, the cable channel CNBC sometimes seemed like a backdrop to daily American
life. Its cheery analysis of the stock market played in offices, in barbershops,
even in some bars. Today, "Dude Room," "Toolbelt Diva" and
other home-improvement shows are the addictive fare that CNBC's exuberant stock
shows once were.
seems like everyone is doing it," Laurie Romano, a 26-year-old self-described
real estate investor, said with a giggle as she explained why she was attending
an open house this month for the Nexus, a 56-unit building going up in Brooklyn's
chic Dumbo neighborhood. She and her fiancé, a dentist, had already put
down a deposit on a Manhattan condo earlier in the week and had come to look
at another at the Nexus.
know whether the housing boom of the last decade will end as the dot-com frenzy
did. But the parallels are raising alarms among many economists, even those
who acknowledge that there are important differences between homes and stocks
that significantly reduce the chances of another meltdown. For one thing, houses
are not just paper wealth: you can live in them.
the most troubling similarity, some analysts say, is the claim that the rules
have somehow changed. In an echo of the blasé attitude that "new
economy" investors took toward unprofitable companies, the growing ranks
of real estate investors are buying houses they never expect to be able to rent
at a profit. Instead, they think the prices of houses will just keep rising.
government reported yesterday that sales of new homes jumped sharply in February,
in the biggest monthly increase in four years. A strong economy and an improving
job market contributed to the gain. But many buyers were also trying to beat
rising mortgage rates, which could eventually cool the market.
Adding to the
parallels between stocks and housing, some of the doomsayers from the 1990's
have returned with new warnings.
going through something very similar in real estate that we did with stocks,"
said Robert J. Shiller - a professor of economics at Yale, whose prescient book
on stocks, "Irrational Exuberance" (Princeton University Press, 2000),
appeared just a few months before technology stocks began their slide. "It's
driven by the same forces: that investments can't go bad; that it has the potential
to make you rich; that you'll regret it if you don't do it; that it looks expensive
but is really not."
A new edition
of Mr. Shiller's book will be published next month. The cover promises an "analysis
of the worldwide real estate bubble and its aftermath."
of a bubble on the verge of popping do not ruffle those who are bullish on real
estate. In Miami, Ron Shuffield, president of Esslinger-Wooten-Maxwell Realtors,
predicted that a limited supply of land coupled with demand from baby boomers
and foreigners would prolong the boom indefinitely.
Florida," he said, "is working off of a totally new economic model
than any of us have ever experienced in the past."
aura of real estate has also helped nudge many families to invest more of their
personal wealth in real estate by buying more expensive homes and taking on
riskier mortgages - much as ordinary workers used their 401(k) plans to bet
on company stocks.
There are certainly
serious reasons to believe that house prices will not suffer the fate of technology
stocks. Not only are houses more tangible, but people do not sell their homes
as quickly as stocks, making a panic much less likely. Because of tax advantages,
few owners are likely to sell and rent something else simply because local house
prices start to decline.
As high as
they might seem now on the coasts, home prices nationally have not quite doubled
over the last decade; during the 1990's, the Standard & Poor's 500-stock
index more than quadrupled.
don't think we have what it takes to prick the bubble," said Diane C. Swonk,
chief economist at Mesirow Financial in Chicago, who was an optimist during
the 90's. "I don't think prices are going to fall, and I don't think they're
even going to be flat."
about real estate has created a 1990's-like stampede of new investors. The night
before the Nexus party, Patrick Cullert, 31, and Jennifer Mathews, 29, who are
engaged, camped out to ensure they would be near the head of the line for one
of 16 condos to be sold at the party. It was today's version of pestering a
broker for shares in a hot public offering.
And many former
stock market enthusiasts are now turning to housing. Douglas Paul, a 46-year-old
former analyst, left AT&T in 2002 to buy and sell stocks on his own. But
he soon decided that real estate could be another way to make quick profits.
Mr. Paul owns two condominium units around Fort Lauderdale and one in Miami
Beach, all bought during the last year, in addition to the one where he lives.
He plans to sell one of the Fort Lauderdale condos in June for what he believes
will be double his investment.
is a very hot real estate market, and I don't know how long it's going to continue,"
he said. "But in the short term, why not profit from it?"
path is an increasingly common one. The National Association of Realtors estimates
that nearly one-quarter of home purchases last year were made by people who
thought of the house as an investment rather than a place to live. Seminars
promising to teach amateurs the tricks of real estate speculation have proliferated.
Even at Harvard
Business School, where students have traditionally gravitated to careers in
investment banking and corporate marketing, real estate is suddenly hot. About
25 graduates have taken real estate jobs in each of the last two years, up from
only six in 2001.
It is not quite
the gold rush of 2000, when about 200 Harvard M.B.A. graduates flocked to technology
companies. But even if they are not working in real estate, some of those graduates
are now investing in it.
a member of the class of 1999, said he recently teamed up with a high school
friend to buy a home in the Central Valley of California "out of pure speculation."
He knows of other classmates who have made similar investments.
at this as a short-term investment," said Mr. Farquharson, 36, who works
for a venture capital firm, "and plan to unload it as soon as things look
to the flood of investors, the parallels between real estate and stocks extend
into mainstream culture.
bulletin boards and blogs like Curbed.com and Real Estate Pimp have taken the
place of financial chat rooms like Tokyo Joe's. ABC has a breakout hit in "Extreme
Makeover: Home Edition," and Home and Garden Television, a once-obscure
cable channel, now draws an average of 827,000 viewers in prime time.
inevitable how-to guide inspired by Donald Trump - "Trump Strategies for
Real Estate" (John Wiley & Sons) by George Ross, one of Mr. Trump's
assistants on his hit show "The Apprentice" - is a strong seller,
already hitting No. 177 on Amazon.com's list in March, less than a month after
At the Nexus
party in Brooklyn, Steve Nguyen, Ms. Romano's fiancé, said he was heeding
Mr. Trump's advice. "He says buy, buy, buy," Dr. Nguyen said.
The same message
is being trumpeted by David A. Lereah, chief economist of the Realtors association,
who argues in his new book, "Are You Missing the Real Estate Boom?"
(Currency), that real estate investors will "experience substantial and
satisfying wealth gains" into the next decade.
that looms over these books is whether they will suffer the fate of another
optimistic talisman, "Dow 36,000" (Times Books), which was a best
seller in late 1999. Its authors, James K. Glassman and Kevin A. Hassett, argued
that stock prices, despite five years of roaring gains, "could double,
triple or even quadruple tomorrow and still not be too high."
The Dow Jones
industrial average hovered around 11,000 when "Dow 36,000" was published.
It dropped below 8,000 in 2002 and closed at 10,442.87 yesterday.
echo of the stock market boom is the role of the Federal Reserve, the nation's
central bank. In the 1990's, the Fed kept interest rates relatively low because
it saw little risk of rising inflation despite a booming economy, helping feed
a fever for stocks. Alan Greenspan, the Fed chairman, famously asked aloud in
1996 whether "irrational exuberance" was driving the stock market,
but then backed off from second-guessing investors.
After the market
plunged and the economy weakened, the Fed pushed interest rates down to 50-year
lows, helping to fuel the housing boom. This month, Mr. Greenspan made some
comments about housing that offered a faint echo of his 1996 musings.
have conjectured that the extended period of low interest rates is spawning
a bubble in housing prices in the United States that will, at some point, implode,"
Mr. Greenspan said in a speech in New York, adding that real estate speculation
had shown a "marked increase." Nevertheless, he said he did not expect
a "destabilizing" drop in prices, in part because home prices across
the country have never fallen significantly.
But by one
measure, houses in at least a few metropolitan areas are as expensive as telecommunications
stocks were in 1999, relative to their underlying value.
house in San Jose, Calif., costs 35 times what it would cost to rent for a year,
according to Economy.com, a research company. In New York and West Palm Beach,
this ratio - a rough equivalent of the price-earnings ratio for stocks - is
In March 2000,
the price-earnings ratio of the Standard & Poor's 500 - the combined price
of the stocks, divided by their profits per share - peaked around 32, and it
was briefly even higher for telecommunications stocks. The S.& P.'s P.E.
ratio has since fallen to around 20.
Still, no matter
how expensive real estate might be, it continues to provide many owners a return
worth boasting about.
who is writing a novel about the idiosyncrasies of New York's rich, said that
at dinner parties in Manhattan, she frequently hears complaints about high home
prices, followed by claims of quick profits. "They always hit you with
their last jab: 'Of course my money's doubled three times over since I got married,'
" she said.
ago, she said, friends at parties were crowing about "making millions of
dollars on paper with $25,000 and $50,000 investments." But "most
of those people," she added, "got wiped out."
Now, the second
piece from the Los Angeles Times:
Stock in Property
Echoing the dot-com boom, many middle- class investors are rushing into real
By David Streitfeld,
L.A. Times Staff Writer
Chris Boome, an insurance agent in the suburb of Burlingame, doesn't
want to work the rest of his life. Who does? But at 58, Boome knows he hasn't
saved enough to retire. So
a few weeks ago, he revamped his retirement accounts. He sold most of the mutual
fund shares and used the cash to buy an $83,500 chunk of land in the Nevada
hills, a stretch of ground he had seen only in a photograph.
is more exciting than a mutual fund," Boome said. "It feels safer
too. You buy a piece of dirt, you feel you'll always have a piece of dirt."
rise in home values is enticing many middle-class Californians to bet on dirt,
gambling their retirements that they can do better with property than with any
In the same
way that the stock market's apparently limitless ascent in the late 1990s seduced
investors into buying shares in untested dot-coms, relentlessly rising house
and land prices are spurring people to do things that used to be considered
unusual if not irresponsible.
in retirement funds, selling stock and taking out second mortgages. They're
pouring the money into real estate, often in distant states, often without seeing
are ruled by either fear or greed," said Robert Campbell, a San Diego investor
who has written a book on timing the real estate market. "At the moment,
it's all about greed. Huge numbers of people are buying in at very high prices."
have been wondering for at least a year if real estate is in a manic phase that
will end unhappily.
Chairman Alan Greenspan, whose policy of low interest rates gets credit for
launching the real estate boom, also has begun to fret. "I think we're
running into certain problems in certain localized areas," he told a congressional
hearing last month.
have already been burned in Las Vegas, until recently the hottest market in
the country. But for most investors everywhere else, any risks are outweighed
by the potential rewards.
who did this five years ago aren't working today," Boome said.
Like just about
every longtime homeowner in California, he's already made a bundle on real estate,
at least on paper. Boome estimated his three-bedroom San Carlos home increased
in value last year by $140,000 about what he and his wife, Sharon, a
nurse, made at their jobs. In the super-charged Bay Area housing market, their
home is worth at least $1.2 million.
If one property
seriously boosts your net worth, investors have concluded, a handful could make
you downright rich.
of homes bought not as primary or secondary residences but solely for investment
jumped 50% in the last four years, according to the San Francisco research firm
LoanPerformance. They made up 8.65% of all prime mortgages in 2004, the company
Assn. of Realtors contends the total is higher. About a quarter of home purchases
in 2004 1.8 million were made by people intent on becoming landlords,
the association's surveys show.
so eager to provide funding that it's easy to do a deal with a down payment
of only 5%. If the house increases in value by 5%, you've doubled your investment.
Many homes in California, the Northeast and Florida have increased by more than
20% annually for the last three years, a run-up with few historical precedents.
like Boome realize they're coming to the party late but feel they have little
choice. The stock market has been lackluster. Salaries are stagnant. The debate
over Social Security has heightened Americans' worries about how to support
themselves during retirement. And even those million-dollar houses are often
less valuable to their owners than they may appear. Second mortgages and home
equity loans have taken away large slices.
time I took money out of the house, I should have invested it," Boome said
ruefully. "But I used it to go on vacation or buy a car."
people invested in real estate near where they lived. That way they could inspect
the purchase and keep an eye on the tenants. For most Californians, proximity
is no longer affordable. Houses in the coastal cities are so expensive that
it's very difficult to charge enough rent to cover the monthly mortgage payment.
to an explosion of buying in the Central Valley. When investments are calculated
as a percentage of all purchases, the biggest market in the country is Redding,
according to LoanPerformance.
nearly one in five Redding homes sold in 2004. Not far behind were Merced, Visalia,
San Luis Obispo, Chico, Fresno and Bakersfield.
in Merced and realized I was three years too late," Boome said.
him over the border to Nevada.
Internet sites, articles I read they all kept saying, Reno, Reno, Reno.
You think of Reno, you think of desert. But it's growing a lot, no question."
visited the Virginia Highlands, a hilly, largely undeveloped area south of Reno.
They stopped to ask a couple walking their dog a few questions. The woman was
a real estate agent. Boome promptly signed on as a client.
He bought his
10 acres on the strength of his favorable impression of the area, his agent's
recommendation and a photograph she provided. "It was a great deal,"
too. The rules for buying real estate with an investment retirement account
are stringent: The purchase must be made through a specialized administrator,
and it must be transacted with all cash. A week ago, the paperwork was done.
He went to visit his dirt.
It wasn't quite
the way he imagined. "It was steeper. And there's a lot of rocks. Big rocks."
He's having a local builder look at the land before the deal is irrevocable.
If this is
a setback, it hasn't dented Boome's enthusiasm.
be worth nothing, but I'm willing to bet it's going to work out," he said.
"I've got a good feeling."
investors are going much farther than Nevada and using different strategies
to come up with the down payments.
years ago, I was like everyone else, trying to get rich on stocks. I thought
real estate was for the wealthy," said Darryl Wortham, a software engineer
with Cisco Systems.
The San Jose
maker of computer networking gear was one of the great stocks of the 1990s,
making millionaires of its early employees. Wortham joined the company in mid-1999.
That was too late for the boom but just in time for the bust.
block of Cisco stock options is underwater," he said, meaning they'll be
worth money only if the stock rises substantially. "Lord knows when I'll
see anything from it."
the 38-year-old Wortham cashed in some of his viable options and sold company
stock he had bought through an employee purchase plan. He then joined an Internet
investment group and bought three houses. All are in Georgia, all cost less
than $200,000, all were bought with 5% down.
has seen two out of the three but intends to keep his distance from all of them.
He doesn't want to hear about busted plumbing from 3,000 miles away. An agency
handles the tenants.
to drive by every week and look at a property and manage it?" he asked.
"I already have a job."
The ranks of
investors like Wortham and Boome have more than tripled in five years, according
to the National Assn. of Realtors. In 1999, 20% of the second home buyers surveyed
by the association said they were doing it for investment purposes. By 2002,
it was 37%; by last year, 64%.
a programmer for the Hollywood website Filmstew.com, bought a house five years
ago near Bob Hope Airport in Burbank for $230,000, sold it last year for $405,000
and immediately bought a new place in Burbank for $569,000. It was recently
appraised at $675,000.
Holoboff was browsing the Internet when he happened on a website that listed
mobile home parks for sale. By the end of the night, he decided to buy a park
in central Texas for a sum he described as "less than a condo in Burbank."
The deal will be finalized in May.
home park is like an apartment building, but better. You can get additional
rent without having to build additional units," said Holoboff, 36. "I
just have to fill the park up."
He hasn't visited
the park yet but has studied the owner's photographs and talked to city officials
about the site's viability. Meanwhile, he bought two homes in Atlanta for about
$100,000 each, paying only 3% down.
and his wife, Karma, have few other investments, the real estate is being paid
for with $100,000 in equity taken out of their house. This has increased their
monthly payments by $440 but that feels a worthwhile price.
is so insanely simple. I didn't have to attend a seminar. I didn't have to read
a book," he said.
The only thing
better than making a lot of money is doing so effortlessly. A variety of middlemen
have sprung up to relieve real estate novices of the burden of doing anything
besides forking over a wad of cash.
the property. Suggest a mortgage lender. Arrange for a management company to
find tenants. And repeat, over and over and over, what a smart thing it is to
be doing this.
Mile High Capital
Group, a Denver firm, has been making repeated forays to California to sell
duplexes it plans to build in Colorado, Florida and North Carolina. Presentations
in San Francisco in January and Los Angeles in February drew about 400 people
each, some simply curious, others brandishing checks.
On the stage,
the Mile High speakers sell the idea of real estate. "I'm telling you,
from the bottom of my heart, you gotta do this," Chief Executive Rick Dryer
exhorted the crowd at the San Francisco convention center.
sales pitch is that it has done extensive research to determine which communities
will be experiencing substantial growth, which will lead to a brisk demand for
One of Mile
High's developments is in Fort Lupton, north of Denver. "Few areas in the
U.S. afford you to go skiing one day and golfing the next," a company brochure
explains with enthusiastic if idiosyncratic English.
At the side
of the room, representatives of the mortgage brokers Investment Property Funding
offered counsel. In the rear, Mile High representatives unfurled scale drawings
of their new neighborhoods. People could mark off the duplex they wanted, provided
they were willing to immediately fork over 5% of the price, which was usually
$330,000. They won't see the finished product for as long as two years
an eternity for investors.
There are other
hurdles. One potential investor asked why the Florida duplexes, located northwest
of Orlando, were described as bringing the owners less than $30 a month after
mortgage payments and other expenses hardly worth bothering about.
buy in Florida," said sales director Andrew Eikenberg, "you're really
betting on appreciation."
walked away, convinced the bet was unwise.
Those who bought
had more faith: that their project will be finished, that the communities in
which they're located will become vibrant, that tenants will be plentiful and
eager to pay enough rent to allow investors to recoup their costs.
And if any
of these things don't come true? The contract states quite clearly: The buyer
assumes all risk, and the 5% down payment is not refundable.
I'm naïve," said Massoud Balbas, a Laguna Niguel computer consultant
who attended the L.A. presentation, "but I thought [the speakers] were
a lot of tech stocks in the late '90s, an experience that left him unhappy.
"I had no idea what I was doing. I put everything in one basket. Real estate
is different. People are always going to need homes."
His own home
has ascended in value from $400,000 to $1 million. That makes the Colorado duplex
he agreed to buy from Mile High look inexpensive. Balbas, 60, has never been
to Colorado and said he had no plans to go anytime soon.
One sign a
boom is peaking is that prices have risen so much it appears perfectly natural
and inevitable that they will keep doing so. Believing the game has only winners,
new investors pile in.
It was against
this backdrop that Kim Kaul bought a house last summer in Las Vegas.
criteria, Kaul, a 36-year-old San Diego homemaker, was an unlikely player in
the real estate investment game. She and her husband, Michael, who worked for
his father's auto-wrecking yard, are of modest means, with four young children
and a rented apartment.
This was part
of the appeal, of course. In San Diego last year, it was impossible not to talk
about real estate, as prices rose 25%. Las Vegas was even more feverish and
had the lure of a much lower entry price. So when Kaul saw a posting on the
Internet bulletin board Craig's List by a man selling a contract to buy a new
Vegas house, she got in touch.
said he had contracted with Pulte Homes in June to buy a three-bedroom house
in the suburb of Henderson for $425,000 but that his financing had fallen through.
He sold the contract to Kaul in August for $8,500, money she took out of the
family's meager savings. Her new investment, which she bought with no money
down, was appraised at $460,000. An agent told Kaul she would be able to sell
in six months for a $100,000 profit. In a market where prices had gone up by
50% in the previous 12 months, that appeared reasonable.
Oct. 1, the Vegas market caught a chill. In the face of weakening demand, Pulte
cut prices. More than 500 would-be investors fled, abandoning their deposits
rather than taking possession of something whose value might decline further.
The speculators' party was over.
For Kaul, whose
model could now be had for $335,000, it was too late. She had closed on her
fall, she was hopeful or maybe just unwilling to see reality. She found a tenant,
who pays $1,250 a month. But her mortgage was $3,000.
When her husband
lost his job, the situation became dire. The couple paid the January mortgage
with borrowed money, then gave up. Their lender is in the early stages of foreclosure,
a process that will ruin their credit rating.
Kaul is chastened
but still believes in real estate: "I'm sure the market's going to pick
up, but I can't hold out that long. This is kind of a bummer."
As real estate
prices have increased, so have the number of homes bought not as primary residences
but solely for investment.
areas for investment, ranked as a percentage of all homes bought solely for
investment in 2004
Redding, Calif. 19.08%
Medford-Ashland, Ore. 18.78%
San Luis Obispo-Atascadero-Paso Robles 18.20%
Visalia*, Calif. 17.98%
Merced, Calif. 17.53%
Chico-Paradise, Calif. 17.52%
Tallahassee, Fla. 16.78%
*Also includes Tulare and Porterville.
It wasn't Passover. It was Purim:
OK. I know it wasn't Passover. It begins on April 23. But I had this great Passover
joke, and I mushed the facts for a great punch line. In case you missed Friday's
column, here it is again:
to the Promised Land.
Moses is taking his people out of Egypt. He gets to the Red Sea. He calls for
his VP Engineering: "Please build us a bridge."
Replies the VP Engineering. "No way. We're in the desert. There's no wood."
Moses calls for his VP Sales: "Please ride back and negotiate a deal with
the Egyptians, which are chasing us."
Replies the VP Sales, "No way, boss. They want us dead. There's no deal."
Moses calls for VP Public Relations: "What can you do for us?"
Replies the VP PR: "Stand on that rock. Ask God to open the Red Sea. Take
the children of Israel through the Red Sea. When you get to the other side,
you'll find another rock. Stand on it, wait for the Egyptians to be in the Sea.
Then ask God to close the Red Sea. Bingo, all your enemies will be drowned."
Moses look quizzically, "This is going to work?"
Replies the VP PR. "Boss, I don't know. But if it does. I'll get you two
pages in the Old Testament."
My friend Ed, a good Jewish boy, is visiting his mother in Florida:
Ed, this one is for you.
A man calls his mother in Florida. "Mom, how are you?"
good", says the mother. "I've been very weak."
The son says,
"Why are you so weak?"
She says, "Because
I haven't eaten in 38 days."
The man says,
"That's terrible! Why haven't you eaten in 38 days?"
The mother answers,
"Because I didn't want my mouth to be filled with food if you should call."
This column is about my personal search for the perfect investment. I don't
give investment advice. For that you have to be registered with regulatory authorities,
which I am not. I am a reporter and an investor. I make my daily column -- Monday
through Friday -- freely available for three reasons: Writing is good for sorting
things out in my brain. Second, the column is research for a book I'm writing
called "In Search of the Perfect Investment." Third, I encourage
my readers to send me their ideas, concerns and experiences. That way we can
all learn together. My email address is .
You can't click on my email address. You have to re-type it . This protects
me from software scanning the Internet for email addresses to spam. I have no
role in choosing the Google ads. Thus I cannot endorse any, though some look
mighty interesting. If you click on a link, Google may send me money. That money
will help pay Claire's law school tuition. Read more about Google AdSense,
here and here.