Property Grunt

Friday, March 25, 2005

The new dot com: Real Estate

This Friday's New York Times did an article on how the frenzy of the real estate market resembles the last days of the dot com boom.

There are certain points of the article that I would like to address.

Nobody can 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.

Houses also need to be maintained which include taxes, utilities and mortgage payments. If it is not generating income it is a non performing asset which means it is costing you money especially if they are not making any money.

The can't-miss 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.

This really scares me. This not the place to take risks with your retirement.

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.

There is a flipside to this. Liquidation of stocks can take second while selling a home can take months. If your money is locked up in a house and all of a sudden the market takes a dive your not going to be able to pull it out in time.

I remember during the dot com era everyone was running to get Microsoft certification or anything Cisco related. Now everyone is running out to get a real estate license.