Beating the Market with Real Estate

Eat your heart out, Carlton Sheets!

by Tom Adkins
12/01/03

If 8.2% growth didn’t convince you, if 300,000 new jobs wasn’t enough to sway you, if rising factory orders didn’t make you blink, and a 10% rise in consumer confidence just couldn’t penetrate your thick skull and prove the economic rebound was well under way, America offers this: 2003’s first literal shopper trampling. This week, at Black Friday’s opening bell of the Christmas retail season, a mob of crazed bargain hunters crushed poor Patricia VanLester at Orange City, Florida’s Wal-Mart Supercenter. Lester was found unconscious but still heroically clutching her $29.95 DVD player.

Sorry, you doubters. When people risk life and limb over cheap electronics gear, the recovery is indisputably well under way.

The market is approaching 10,000. Time to hop on board for the ride! After all, when the stock market roars, it’s like an unleashed wild beast, devouring all skeptics and fattening the wallets of all who surf the wave of capitalistic wealth creation! How can you beat American stock markets when they go nuclear?

Actually, there is one investment, over time, that you can usually beat the stock market with ease: real estate. And now is the perfect time to invest.

Wait a second! Didn’t we just have the greatest two-years of real estate in American history? Yep. We sure did. But guess what? It’s about to get way better. That’s right…better than the 20%, 30% and even 40% growth we’ve seen in some places.

Oh, sure…where am I gonna get my hands on a fat wad of cash? First, you could dump that hovel and get something better. Get your next house now. The longer you wait, the greater the dollar difference between your cozy little townhouse and the McMonster you secretly crave.

Second, if you are smarter, refinance your current home and wring every cent of equity out of it…and turn that humble abode into a rental property. Stop listening to the stupid horror stories all the “experts” tell you. Just use common sense and select a good tenant. Credit reports are now available on the Internet. And remember, even if a tenant beats up your carpets, your home has usually appreciated more than the loss.

Third, if you are really, REALLY smart, you will take that equity, then go buy your next home with ABSOLUTELY NOTHING. That’s right. There are PLENTY of no-money down loans out there right now. Most of them come in the form of an 80-20 loan. That is, an 80% first mortgage, a 20% second at a slightly higher rate, and (drum roll, please) no private mortgage insurance. You get a bonus if you use an interest-only product, and a gold star if you get the seller to pay the closing costs, even if you inflate the sale price to cover it.

Worried about your other debts? Put less down on the house, and pay off your loans.

But most important, lock in that principle balance before the market gallops away.

So why does real estate beat the market? Because it’s leveraged. If you get 10% appreciation on a 5% investment, that’s a 300% return, folks. No money down is even better.

So why is this such a good time to invest? Consider this: we just had our first real recession since Jimmy Carter. Yet housing prices skyrocketed. Why? It goes back to the 90s. That good economy was created by the capital gains tax cut and Welfare reform. But old-school Alan Greenspan couldn’t resist meddling, and jacked up interest rates to crush the hot stock market. Unfortunately, he took the entire economy down with it. By the time Greenspan figgered out he screwed up, the economy went recessionary.

Then, Greenspan woke up and cut interest rates to spur the economy. That brought mortgage rates down. Way down. To almost 5%. And even when 6% of the people are out of work, 94% are still working. And they bought houses. Lots of them. Since there were more buyers than houses, we had amazing, unprecedented appreciation.

Then, of course, the economy went nuts.

But that means interest rates will rise, right? Normally, I’d say “yes.” But after 50 years as an economist, Greenspan finally figured out growth doesn’t equal inflation. He promised low rates until unemployment gets back to 4.5%. That will be a while.

That means we missed the boat, right? And the bubble will soon burst, right? Uh…no, actually. Remember, those record price increases came because of low interest rates…during a recession! But now, we have low rates with record growth. What do you think that will do to prices?

The law of supply and demand is inarguable. Low rates, more wealth, higher growth and no inflation equals amazing housing price increases. You can count on it. Buy now.

Of course, appreciation isn’t universal. If your neighborhood voted for Al Gore, you are probably living in a place where prices are not doing well. Except Hollywood and the Hamptons, typical Democrat neighborhoods are bad risks. And as suburbs grow, some rural areas are falling in the toilet as well. So pay attention. But for most neighborhoods in America, now is the time to move up.

Finally. when you’ve rented your old home, and bought your new home with no money down, and you have a big wad of cash left over…what do you do with the money?

You invest it in the market, silly. It’s about to hit 10,000. All aboard!!!