Thursday, June 7, 2007

Stocks Vs. Housing

USA TODAY

Historically, stocks have always been superior investments to housing, according to a comprehensive study by Ken Winans, president of investment research firm Winans International. From 1920 to December 2006, the average new home appreciated from $4,030 to $276,400, a 6,759% gain, he says.

But in that same 86-year period, the Dow Jones industrial average returned 17,210%, not even including dividends. Stocks still beat real estate over the past 20 years. New home prices gained 268% from 1986 to 2006, a fraction of the Dow's 1,193% gain, Winans says.

But as anyone who bought stocks back in 2000 knows, neither real estate nor stocks are safe investments.

For instance, Winans says that during the Great Depression, real estate lost 73% of its value and the stock market declined more than 90%. Realtors don't forecast real estate prices to fall that much this time, but the estimates continue to worsen.

The cycles of investing return to stocks

The migration from real estate to stocks is part of the
natural swings investors go from loving an investment class to hating it, says Robert Shiller, a Yale professor who studies market movements. Just as investors saw housing as a haven from the bear market for stocks in 2002, they see stocks as their best bet now as some housing markets go from bad to ugly,
he says.

Housing saw a 73% decline during the Great Depression? It lends some credence to projected 50% declines now being broached by some economists. The worrying figure is however the 90% decline of the stock market during that tumultuous time. Who didn’t get that they both happened in concert? My worry is that we may be facing a similar situation now, different mechanics but same outcome.

Stock markets around the world have been acting irrationally seemingly with a mind all their own, with no clue by this investor as to what in hell is going on. The activities of private equity groups leveraging billions of dollars to fund mergers and acquisitions should have us as investors shaking in our boots. Derivatives funds leveraging huge debt in a market that most of us don’t understand nor would we be given an inside look into, should be cause for concern as well. I’m quite sure that some of the debt leveraged by these private clubs is mortgage debt, very risky!

In the mean time stocks look great. Many of those who are able are now following them from housing as the Dow and S&P hit new records, but for how long? I fear that when the music stops there will be far more butts than chairs.
Vern

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