It's 9 on a Sunday morning and this lunatic rings my front door bell. He's from a real estate agency in town and wants to know whether I would like to sell my house. He has a buyer who is willing to pay me double what I paid for it four years ago. Double? I gulp. The man nods his head. I'll get back to you, I say.
I quickly call my friend Bob Husted, a real estate broker down the block.
"Bob," are our houses now worth double?"
Affirmative he replies but business is off right now. He explains.
"It's kind of quiet out there. People who wanted to move over the summer to get their kids in school for the fall term have already done so. We should see little movement until the fall when it could perk up again." Could seems to be the controlling word.
I call David Steinberg, my mortgage broker. Have mortgage applications gone through the roof, I inquire.
I can hear his head shaking negatively. No, there was a little movement with people running away from the stock market but that has quieted somewhat. However, home-price appreciation has gone up notwithstanding the 13 percent decline in the S&P 500 index.
I now have a giant size headache. Number 53 actually.
So, what's going on here? Should you be investing in real estate, whether remodeling or buying a second home or even a rental property? Apparently, there are lots of schools of thought out there. But consider some facts. For one, home prices increased 5.6 percent a year over the past 25 years, according to the U.S. Office of Federal Housing Enterprise Oversight (that's a mouthful). This return outpaced the average inflation rate during the same period by 1.5 percentage points.
Okay, we proceed. Ibbotson Associates in Chicago says that if in 1972 you had put $6,480 (which they claim is the average down payment on a $32,400 home at the time), into the S&P 500 and reinvested dividends, then you would have $203,810 today, which they claim is some five percent less than you would have if you bought the house.
What's this lead to? Simply put, investing in real estate to me is always a good idea but comparing houses with stocks is downright tricky stuff because housing prices vary so widely depending on the market at the time. Consider that the median home price in this country rose eight percent in the first quarter of 2002 from a year earlier, says the National Association of Realtors. But watch out for the variations. Nassau and Suffolk Counties on Long island in New York saw average home prices rising 26.5 percent compared to Port Arthur, Texas where it fell 8.1 percent.
And keep another point in mind. If you toss out the stocks and buy a piece of real estate, you increase your investment risk because you are still concentrating in one market instead of diversification. Now do you have a headache?
Try Mega Millions instead.
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