Real Estate was the cause of it all or so it seemed over the last six or seven years as the financial world came crashing down around us. Banks acting badly gave mortgages to people who wanted the American dream but couldn’t afford it. The result was your home, if you owned one, was suddenly worth a lot less than it had been. If you owned a second home, those markets were hurt the worst of all. Think Arizona and Florida where prices dropped in half.
What is likely to occur going forward is that prices will return to long term modest growth rates such as prevailed for decades. Homes will be for living in and not for flipping as they had become at the height of the bubble. That is notwithstanding the real estate investment trusts and funds that decided to buy up homes in foreclosure a few years ago and rent them out. It’s not clear when there will be enough new buyers to actually turn those into profitable long term transactions with returns to rival the stock markets over the next decade.
The chart at right shows that the all time high price of the Case Schiller Index occurred at 226 on June 30,2006. The bottom tick was in the first quarter of 2012 at 146 a peak to trough decline of 35.4%. . The index as reported today is 180.27, still a long way to go to the high of 8 years ago. It is up 23% from the low but is still 20% below the peak.
I have always been willing to buy property when nobody else wanted to or thought you were crazy. I raised my children in a house in Manhattan. There aren’t more than about 1200 of them so when my son went to a new elementary school and was asked where he lived, a child in the class called him a liar when he said he lived in a house near Gramercy Park. In that other child’s experience he had never known anyone who lived anywhere other than a high rise apartment house in moderate space. We bought that house when NYC was going bankrupt. “Why,” I was asked repeatedly would anyone do that? The answer is simple. NYC wasn’t going away as a home to millions and if the price is right then “Why not?”
This advice pertains to any asset class you can imagine: Stocks, Bonds, Gold, Silver, or any other investment class you can think of. It is much harder to lose money when you pay a low price. It is easy to lose money when you get caught up in the euphoria and pay $1000 for Apple when not so long before it was $25. Slow and Steady is vastly superior to Easy Come, Easy Go.
–Joan E. Lappin CFA Gramercy Capital Mgt. Corp.