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Own Your Life Articles Own Your Life publishes articles in our monthly newsletter available to Own Your Life Members. Article: "How Passive is Passive Income?" Click on the title above for a sample of an article from the September 2008 Own Your Life Newsletter. ------------------------------------------------------------------------------------------------------------------------------------------------ Article: More on Diversifying Investments with Real Estate and the Stock Market November 19, 2008 Today, the Dow Jones Industrial Average closed below 8000 for the first time since 2003. Since the last article six weeks ago (shown below), the paper value of stock equities lost an additional $2 trillion. Since most Americans own stock in one form or another (e.g., mutual funds in an IRA), this affects just about everyone either directly or indirectly. We spend much of our adult life putting away as much as we can from our ongoing/monthly income and then invest it as wisely as we know how so we will have enough money to live a reasonable lifestyle when we retire and enjoy a few things along the way. Lessons from 2000-2002 Those of us that had a lot of our net worth tied up in stocks in 2000, lost about half of that by 2002 (assuming a portfolio that contained some dot com stocks). I was one of those people and although I already had some investments in rental real estate, I realized that that I needed to change my allocation percentage of stocks, bonds, real estate, precious metals, small business ventures and personal skill set. Yes, I view personal skill set as part of my investment and asset portfolio. All of these assets can be leveraged to generate Cash Now, Cash Soon, Cash Later and Cash Much Later. Some of the income and wealth building is passive and some is active, but I didn't want to get caught again with too much of my financial well-being tied up in any single category. The solution then (as it is now) was to rebalance our mix of wealth accumulation and income sources. As a result, many of us learned the lessons from the 2000-2002 drop in the stock market and added real estate to our investment portfolio. Before we discuss the results of that decision, we should each ask ourselves if today's dropping stock market provides incentive for investing a few minutes or hours reconsidering our mix of investments in our personal portfolios. The Data Following is a graph that shows the performance of the stock market (S&P 500: red line using vertical axis on the right) at the end of October every year since 1999, as well as the median sold house price for each year through the end of October in three major southern New Jersey counties. Please note that although areas like California, southern Florida, Arizona and Nevada are experiencing bursting real estate bubbles, many other locations around the US show much more stable price behavior like our area in southern New Jersey. Days on market have doubled in the past 3 years, but prices are still not far from their all-time highs in 2007.
From 2002 to 2006, both the stock market and South Jersey real estate enjoyed impressive gains and they both even had similar % increases. Of course, due to leverage, the real estate did a lot better. In 2007, the stock market kept on chugging along higher, while South Jersey real estate was leveling out. Those of us that had stocks in 2000 celebrated when the S&P 500 hit 1500 again in 2007...where it was in March 2000 before the stock market started to tank. However 2008 brought some surprises. At the close of the market this afternoon, the S&P 500 hit the low of September 2002, which was also the high in September 1997!!! Had I kept my life savings in the S&P 500 for the past 11 years expecting 10% or so of appreciation per year, I would have been today where I was in 1997. As of today, the S&P 500 dropped about 45% in the past year. For all the talk of a bursting bubble in the US real estate market since 2006, we have been relatively stable in South Jersey. The October year-to-date median sold prices in the three South Jersey counties dropped 1-5% in 2008 relative to 2007. This followed an approximate doubling of real estate prices since 2000 and much of that was since 2002. What to Do Now? No one has a crystal ball, including me. This by itself is a good reason to have a diversified investment portfolio. Diversified means more than just the "right" allocation among stocks, bonds and cash. At the same time, diversified means more than just 100% real estate. Could the S&P 500 go back up to 1500 within a reasonable period of time? Sure, anything is possible. But on a day like today when GM hit a 60+ year low, the recession looks like it will take a while to recover (through the end of 2009?) and then the recovery might be slow. The stock market will surely return and surpass 1500, resulting in appreciation for new money. The unknown is how long will it take. Could South Jersey real estate give back some of its gains from 2000 to 2006? Sure anything is possible but during the past two years, while California, South Florida, Las Vegas and Phoenix were giving back significant gains, South Jersey stayed relatively stable with slight year over year losses in most neighborhoods (some, like Willingboro are tanking like California, but most are not). We just don't know what will happen and how long it will take. Since we don't know what will happen, a diversified portfolio is something to be considered. If you don't have real estate in your portfolio, this buyer's market may be a very good time to pick up real estate at a discount. To be sure, the real estate should be acquired thoughtfully and using a complete investment strategy (i.e., buying, selling and everything in between) appropriate for your location and stage of your local market cycle. This might be a good time to re-read Chapters 10 and 26 of the book "We Buy Houses, Sometimes! Own Your Life through Real Estate Investing" that deal with choosing the four investment strategies (Chapter 10) and stages of the market cycle (Chapter 26). Regardless of what the updated graph will look like in five years from now, what lessons do you think you will have learned from the recession of 2008-2009? Marc Halpern Own Your Life LLC 856-324-5082 ------------------------------------------------------------------------------------------------------------------------------------------------- Article: Invest in Real Estate as the Stock Market Tanks? October 6, 2008 After six market days of extreme volatility and price drops in the stock market since the first bailout vote by Congress, on top of the one-year bear market, many are asking, will there be a shift of investments to real estate as people dump their stock portfolios and mutual funds? This article will attempt to see if there is a correlation between house price trends and the stock market in recent history. Even if there is, it doesn’t mean that there is a direct cause and effect relationship, but certainly real estate and the stock market are major targets for investment of money for which the ultimate source is the money of individuals (savings and income, either directly or through institutions). We examined the answer to the opposite of this question when trying to predict the end of the real estate bubble back in 2005. In an attempt to figure out the dominating factors to answer this question for today’s market, we are revisiting this issue.
The graph shows the S&P 500 (up to date as of today’s close) which is the green line and uses right Y-axis. The graph compares the S&P 500 to the Housing Price Index (published by OFHEO – government agency) for the three largest US metropolitan statistical areas (MSA’s) since 1995. The HPI’s are shown by the other colored lines and use the left Y-axis. The reasons we chose the three largest US MSA’s are: It may not be valid to do the analysis this way using only three data points, but it is still interesting to look at the trends. Let’s look at the stock market first. The S&P 500 had two maxima in the past 13 years and the market fell roughly 40% after the peak in 2000 and so far the market has dropped roughly 30% since it’s high in 2007. What happened to the real estate market during this time? Many people noticed that much of the acceleration of the rapid appreciation in the early 2000’s in many US real estate markets coincided with the burst of the stock market bubble that that started in March 2000. Huge amounts of money did indeed flow from the stock market to real estate. But then from 2003 to 2007, the S&P 500 increased by roughly 80% while the real estate market continued to increase as well, mostly with rapid appreciation (depending on location). Is it possible that the stock market bubble burst simply lit the match for a real estate bubble that continued to be self-sustaining even as the stock market increased after 2003? It’s possible. But there are many factors at play here and it is hard to determine that one single cause and effect relationship dominates all others. Another important point from this graph is that even though the much publicized California real estate market tanked from 2006 to date, the New York and Chicago real estate markets did not experience such dramatic bubble burst, at least through the end of the 2nd quarter of 2008. Of course, real estate investors of single family homes must study their specific properties in their specific subdivisions since individual neighborhoods often have market behaviors that are radically different than their much larger metropolitan statistical areas. Some properties dropped in value, while many other stayed at the same value (even while days on market increased) and some properties even increased in value since 2006. Each property must be considered on a case-by-case basis. The old adage, “it is hard to predict the future based on past performance,” applies here as well. Nevertheless, it appears that there is a lot of merit to the argument that as people’s stock investment portfolios are suffering unpredictably, many might seriously consider buying real estate that is expected to recover when the credit crisis shows signs of recovery. If that takes 2-3 years, then now could be a very good time to buy real estate at discounted prices and sell in 2-3 years, especially in affordable MSA’s, like Philadelphia-Southern New Jersey. Is this speculation? Each person must determine that answer for himself/herself. We are buying real estate now in Southern New Jersey where the ratio of median house price (in the low $200K’s) to median income is attractive at about 3.5. Real estate prices in Southern New Jersey have been relatively stable since reaching the highs in 2006 after 5 years of rapid appreciation. This followed 10 years of little or no appreciation, resulting in good affordability today. Today’s buyer’s market provides plenty of opportunity to buy real estate in Southern New Jersey and other affordable areas at a discount of 15-20% below today’s retail value. If we buy at 15-20% below today’s retail value and sell these properties at 10-15% above today’s retail value in 2-3 years from now when the credit crisis is resolved (or mostly resolved), then one can make $50-60K per property in 2-3 years. This is attractive, especially if we leverage other people’s money to buy the house (hard, but not impossible, today) and have tenant-buyers (lease-option) cover the underlying payments plus some positive cash flow. We are finding that there are plenty of tenant-buyers that have income but not the credit to buy a house, so lease-option with a 2-3 year term is working well at this stage of the market in affordable areas. Every investor must do his/her own due diligence before investing in any property and any area. The point of this article was to discuss the thought process of shifting money from the stock market to the real estate market in areas that might see appreciation when the credit crisis is resolved. We are finding good opportunities now and it is worthwhile to examine opportunities and fundamentals for your area. Marc Halpern Own Your Life LLC
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