Real Estate vs. Stock Market

The

main difference between forces that drive residential real estate values and forces driving stock values is... The Stock Exchange is driven by company earning’s which fluctuate with changes in political, economic and business activity. Investors trying to guess what individual company stocks will do in the future, buy and sell these company stocks which cause stock prices to move up and down very quickly. Consequently, this liquidity creates these volatile markets and investors may experience big gains or big losses trying to time these volatile movements for profit motivation. Conversely, and for those who don't want to play this volatility game with all their assets, for residential VACATION and SECOND HOMES it is supply, personal use, inflation and interest rates that drive demand for residential real estate market values, and can fuel upside values. It is likely most of the housing in any area will have similar movement in value, i.e. there is less need to "PICK a WINNER" as in the stock market. But, regardless of how high or how low supply of homes is or these other driving forces, the intrinsic need for shelter (a roof over your head) continually fuels demand for residential real estate--LONG TERM!. In reality and supported historically, home owners will not normally sell their residential property for less than they paid, i.e. they hold their properties for income or personal use unless there is an urgent need to sell. Since real estate doesn't fluctuate with dramatic UPS and DOWNS, that's Fundamentally why most real estate is considered lower risk for long and medium term owners.

Today's Nasdaq Quote ...................................... Today's DJI Quote
                        

Risk

of real estate then is controllable. There is a saying all real estate professionals know...."the three most important factors of real estate are....LOCATION, LOCATION, LOCATION." That's pretty close to true but anecdotal of course. In reality and realistically, the traditional risk of real estate ownership are 1.) high leverage, 2.) low liquidity and 3.) location, or reduced appeal of a location. These risk can be greatly reduced for cash buyers on oceanfront real estate. Why? If there is no mortgage or debt to service (no mortgage payments), and there is no need for immediate liquidity, risk of foreclosure or loss of your property is minimal. That's not the case with any other business venture which is vulnerable to loss from economic conditions.

Since most owners hold or use their residential properties, there would be no “ sell-off” or “rush to sell” periods such as Bear Markets, as we often experience in the stock market. That explains why it is rare (although not guaranteed) to see volatile real estate values, especially in oceanfront, since God isn’t making any more oceanfront. Oceanfront has a built in limit on SUPPLY, which puts natural pressure on the upside value of oceanfront property. Then, residential property devaluation is less likely from either over supply or location going bad since it’s just not likely there will be a loss of appeal in nature’s beaches and ocean. The “lure of the ocean” is too real....and it is unlikely God will make more oceanfront.

Will the Bubble Burst?

Condidtions that cause real estate to go down, i.e. an imbalance in Supply and Demand, namely an oversupply of oceanfront condos is not likely. This is because there is a limited supply of beachfront for new building which is one reason 'oversupply' could occur. The only other reasonable conditions that would cause an oversupply of oceanfront condos for sale would be if the LOCATION goes bad. If that happens there could be an imbalance caused by an oversupply and prices could drop. The question is, will beachfront and oceanfront condos ever be "Out of Favor" to the point there is a herd of sellers trying to GET OUT of their oceanfront residence. That is the risk one takes when buying on the ocean or any investment of any kind. That is the risk you ask yourself when putting your money into an oceanfront investment.

Dr. Dean Gatzlaff, professor of real estate and business law at Florida State University in a recent article (Florida Today, October 6, 2002) entitled "Do rising prices mean bubble," explains in the same way "Bubbles are caused by herding mentality, the result of which is a huge flow of cash pushing up prices....." and Wendy Murry, President of Melbourne Assoc. of Realtors says..."We were really underpriced for a long time, and we're just catching up with our neighbors." Their analysis of this BULL MARKET in Brevard County then begs the question, what would cause a herding mentality to sell your personal residence or second home on the ocean? Hypethically speaking, just because unit 102 sells lower than recent sales because the owner just lost their job and must sell immediately because they can't make the payments, doesn't mean unit 103 next door would likely sell lower than recent sales, or that prices are coming down. Each condo in a residential invironment is it's own market and doesn't move according to units in the same marketplace unless it is an upward panic to Buy.....NOT Sell! Remember, there is an emotional attachment when selling personal residences that isn't there in most other investments.

Opinions based on thirty five years in sales and syndication of investments, by: