Once the Genie Is Out of the Bottle, She's Out!

Roger Schlesinger
|
Posted: Aug 19, 2008 6:13 PM

The statement above means: once people learn how to make money in residential real estate, there is no going back. Many people believe that real estate as an investment is dead, buried and never to be seen again, but I sincerely believe they are wrong. As I write this, there is a new class of millionaires-in-training who are preparing to get wealthy in real estate. They are buying all the foreclosures, in good areas, they can find. About 3% of the population is busy in this enterprise and about 30%, 10 times more, are people who will tell anyone who will listen that real estate investment should be talked about only in retrospect. Let them talk, while the smart ones are out there. Oh, by the way, not all the smart ones are Americans. Many from across the pond are here spending like they have 50% more money than they do…well actually they do as many currencies have a very positive exchange rate with the dollar.

Why am I so sure about real estate investment? During my early financial training in the securities business, I watched a small-business environment become a mega-industry, showing how great wealth can come from inauspicious beginnings. When I was active as a stockbroker in the 1960s, the number of shares traded in a day would not quite equal the number of shares traded in a minute today. A billion shares change hands each day the markets are open now; about 6 million changed hands then. The ‘60s even had a mini stock market crash and managed to get up to 28 million shares May of 1962. How could this almost 100-year-old business become a giant in its most recent decades? I will be happy to give you my eyewitness account.

The mutual fund industry came to life in those swinging ‘60s. The growth of the Fidelity Group of Funds, for instance, was so phenomenal that one of the fund managers, Gerald Tsai, became a superstar and launched his own fund that was oversubscribed upon the offering. How could this happen? Thanks to mutual funds, ordinary people, not just bankers and corporate presidents, could take advantage of the stock market by making small investments, and they did in droves. In turn, the mutual funds would buy the common stock offered on the stock exchanges and volume started to build. From here, Congressman Keough authored the House of Representatives HR-10 bill which became law and the Keough accounts for retirement were born. Today they are better known as IRAs. Once the ball got rolling, there wasn’t any stopping it and people found the stock market a fine place to invest their money thanks to the new-found security and simplicity of mutual funds and IRAs.

The stock market had its setbacks as well and people lost money, swearing that not only would they never invest again, that the stock market would never rise again. Wrong! But it does sound familiar. As volume grew, the brokerage houses began inventing some of wildest investments commonly known as derivatives and the rest is history. A billion shares a day is nothing to sneeze at and we are only just beginning. In the 1990s, the Internet craze hit Wall Street and the “new economy” pushed even the poorest of Americans to find a way into the market and receive riches beyond their wildest dreams.

At the dawn of the 21st century, Wall Street ran out of steam and all the riches started to look like “fool’s gold.” People pulled out, gains turned into losses, and the stock market came down. Again the thought was “it’s over and it isn’t coming back.” For the general public, “never” lasted only about four or five years. That’s when investors and stock market gains returned.

Now let’s take a look at real estate. I bought my first house in 1968 for $37,500, and five years later I sold it for $43,000. It took 6 months to sell, which wasn’t unusual at the time, and the profit was about right. I bought a bigger house for $44,000 and 3 years later I sold it for $72,000 over a weekend. Wow! How did I yield that tremendous return? Inflation, inflation, inflation! What got it going? Believe it or not: oil. It came with an embargo that drove prices up. Houses couldn’t be built for the same costs because building materials were spiking. Sound familiar? Starting in the early ‘70s, everything went up in real estate in Southern California until the late ‘80s and early ‘90s when the aerospace industry, one of the largest employers in the state, stalled with the end of the Cold War and moved to less-expensive states, triggering a mini-recession. Prices fell and didn’t return until the middle ‘90s. What helped bring the market back was the Federal Reserve cutting interest rates and ushering in 30-year lows in rates in 1993. By now you must be getting the picture.

The turn of the century also brought an unprecedented attack on our shores that changed a stock market recession into the beginnings of another bull market in both the stock market and the real estate market. What facilitated this was another drop in interest rates by the Federal Reserve to 40-year lows in the early 2000s and we took off, full speed ahead, until we hit the wall. Is everything the same as it was in all the earlier times? Not exactly, but we are a pretty smart nation and we will figure out how to get rolling again. If it doesn’t appear to be happening, check the underlying data and you will see that we could be close to or have already hit the bottom in a number of real estate markets. The fact that real estate is more a local phenomenon and the stock market a national one should be noted as some real estate markets will soar from this point and some may never rebound.

Five to ten years from now, we will look back, wonder what the fuss was all about, and ask why we all didn’t take advantage of the opportunities. That also never changes because as they say, hindsight is 20/20.

I have tried to paint a picture of the investment world and why we always say it’s changing while it basically remains the same. At least now you can tell the “naysayers” to take a hike and feel confident, based on history. Like I said, the genie is now out of the bottle. I’ve told you why you should be investing in real estate. There is no going back. Time to make your wishes come true!