Notes on Real Estate

Value investment in real estate is literally "dirt simple". When you own real estate, you own a piece of property, a piece of the planet. In fact, you own that piece in the shape of an inverted pyramid, right to the center of the earth. You also own the air space above it, and you own all the improvements thereon. You own air rights, water rights, mineral rights, and oil and gas rights. You own the rights of reasonable enjoyment and use.

Simple as this all seems, it makes owning this "dirt" arguably more valuable than owning money, gold, diamonds, stocks and bonds and government and private retirement programs.

Consider the difference between our Gross Domestic Product increase in the last two decades (281%) and the "promised" increase in value of our financial investments, the Dow Jones Industrial Average, Standard and Poor's 500, and the NASDAQ.

"In order for wealth to be real, it must be easily converted into goods and services. No matter how high stock prices may climb we cannot consume more than we produce." [Eldred] This dangerous gap between GDP and the major investment vehicles has us in a precarious national financial situation.

This is castles-in-the-air thinking come to life. Much of this has come to negative fruition since the 2001 statistics shown here, and verifies the proposition.

Some people, a small but touted percentage, will win the roulette wheel game of the stock market and discover the next MacDonald's or Microsoft, or they will liquidate holdings on current high runners before the masses.

Other areas of investment for the future have also suffered. Unfortunately, many retirement portfolios and mutual funds took risky stock positions prior to the recent "correction". (Of note, the wiser of them are reportedly seeking out commercial building, new home development, and other real estate based investment).

As much as it is tempting to blame political situations for the state of the economy, it is important for the wise investor to keep in mind that we must sign the investment check before our investment can exist as such; There is always an over-riding sentiment as to the"best investment", the safety of one versus another, and the wisdom of certain paths. Much of it is voo-doo and cultural predisposition. The true wisdom often lies buried beneath the surface.

Consider the term "Investment", versus "Speculation" and "Gambling". How do we tell the difference? How do we apply wisdom? Today, the term "Investment" is used by almost everyone who wants to sell us on almost anything. Consequently, the term "Value Investing" has arisen to point out the difference, be the exercise one involving the rolling of dice, the playing of poker, the purchasing of Municipal Bonds or the buying of a four-plex.

Value Investing is a term which evolved from the efforts of financial gurus Graham and Dodd, and although they themselves never penned the term, it has been applied to their approach. Again, on a dirt simple level, Graham put forth the following definition of investing, with the purpose to clarify its difference from speculating and gambling. "An investment operation is one which upon thorough analysis promises safety of principal and an adequate return." Furthermore, "A true margin of safety is one that can be demonstrated by figures, by persuasive reasoning, and by references to a body of actual experience." From this evolved the term Value Investing.

This does sound simple enough. Like so many truly simple things, actualizing and applying the principles is a demanding and challenging process.

I will not tell you that all real estate investing is superior to other types of investing. I will say that real estate offers more valid opportunities for Value Investing than most people are aware of. It offers more substantive value than paper promises. It offers a more historically sound promise of equity increase, and a greater opportunity for reasonable liquidity.

At this point, I urge you to do some research into the matter. Search engines will avail you of considerable fodder, and the library contains books by Ben Graham and David Dodd, as well as their book, Security Analysis (1934). The book, Value Investing in Real Estate has prompted much of this newsletter’s material. (Gary Eldred, Ph.D.)

Sound, practical real estate investing can be done with less money than one would expect. If you aren't considering adding real estate to your investment portfolio, consider doing this. Go out in the back yard and scoop up a handful of dirt. Think about the real value of what you have in your hand. It’s dirt simple.

According to the U.S. Census Bureau, there are 314,000 homes in the United States valued at over $1- million. Currently, locally, there are over 400 million dollar-plus properties for sale (according to the Multiple Listing Service).

Freddie Mac yesterday released the results of its Primary Mortgage Market Survey in which the 30-year fixed-rate mortgage (FRM) averaged 5.99 percent, with an average 0.7 point, for the week ending August 5, 2004, slipping from last week when it averaged 6.08 percent. Is it going to go up or down?

T. C. says: When the cost of a loan goes up, the price of an affordable purchase goes down for the prospective buyer. The people lending money won’t let you borrow as much because the cost of the loan effects your debt-to-income ratio. It is possible to now play with ARMs (adjustable rate mortgages) and other financial gadgets to keep you at your previous purchase level, but you must correspondingly ask, "Why now instead of before?"

Alternately, sellers may either have to lower the price of their homes, or wait for buyers who are compromising downward (the buyer who would have bought the $300-thousand dollar home is now going to have to settle for the $290-thousand dollar home). Their previous potential buyers are now looking for less expensive homes, too.

This puts the buyer with the best mortgage broker at a considerable advantage.

What does this mean in terms of real estate investment?

And… Does this mean that the value of the homes has gone down? (Trick question)

Stay tuned for further newsletter developments of these questions and more.

That’s it for now. Except this:

1. If you have interests or questions, please e-mail me or give me a call.
2. Check out my website HERE

The opinions expressed in this newsletter are solely those of Tom Crone and others being quoted and do not necessarily reflect the opinions of Coldwell Banker Burnet or its affiliates.