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Could You Get Trampeled?

The opinions expressed by columnists are their own and do not necessarily represent the views of
Crowd psychology is interesting, especially when it comes to investors, who generally move in the opposite direction from the one in which they're being led. When an action is taken to try and change market behavior, it generally accelerates the movement in the opposite direction. Over the decades, if the stock market were overheating, the powers-that-be would raise the margin requirements, thereby increasing the amount of cash investors had to put up when borrowing money with which to buy stock, thereby dampening demand. However, more often than not the public perceived the margin restriction as a signal that things were even better than they had thought and they rushed to buy more stock.

Going Rogue by Sarah Palin FREE

This also happened in the reverse. If things were slow and margin requirements were reduced in order to stimulate buying, it in fact produced more selling. The American public isn't so easily manipulated. Now we are facing diametrically opposing views of the stock market. Stocks continue to rise with no top in sight, while many of those ”in the know" feel the market is due for a major correction and will be heading down, sooner rather than later.

Real estate, on the other hand, is in the doldrums, to say the least. The combination of low prices and low interest rates, the daily double that, under ordinary circumstances, would attract buyers in droves, has failed to do so. Even the enticement of an (up to) $8,000 tax credit for first time buyers has failed to generate any excitement about the real estate market.

Let's take a look at the two, beginning with the stock market, which raises several causes for concern:

1. Price earnings multiples. Stocks appear to be fully priced, if not overpriced, when viewed in this perspective. Many companies' current earnings reflect cost cutting rather than sales growth. In most cases sales have stopped growing, which doesn't bode well for future earnings. A company can sustain earnings through cost cutting measures for only so long until it's forced to close down its operations. 2. Commodities. Many companies that produce or process commodities - oil, cement and gold, for example -- are experiencing higher stock prices due to the weakness of the dollar. Once the Federal Reserve starts raising interest rates again, the dollar should firm up and these companies might well lose value. A stronger dollar also could affect multi-national companies, which currently benefit from a favorable exchange rate for their foreign operations. 3. Consumers. We have a consumer-based economy. Retailers have slashed their prices, but consumers haven't returned in significant numbers. Even when they begin to shop again, Americans will be much more cost conscious. Retailers will have a hard time raising their prices, making it difficult if not impossible for them to recover in the foreseeable future.

Now, some compelling reasons to look at real estate:

1. The current real estate market is a proverbial "buyer's paradise," comprising low (extremely low) interest rates and drastically reduced prices. Anyone who doesn't own a home and has the wherewithal to buy one, or who has the ability to purchase a second home, should seriously consider doing so now. The chances of conditions so favorable to the buyer recurring in the foreseeable future do not seem great. In addition, first time homebuyers, or those who haven't owned a home during the past three years, can take advantage of up to $8000 in tax credits if they close by November 30, 2009. 2. Foreigners - - Canadians, Chinese, Europeans, and especially the British - - are taking advantage of their additional buying power due to favorable exchange ratios between their own currencies and the dollar, which continues to be weak. Extreme cautiousness and limited resources keep American buyers on the sidelines while foreigners pick up the bargains. 3. The real estate market isn't homogenous. Demographic trends suggest a shortage of available homes in certain areas. This affects both first time homebuyers and baby boomers looking for second homes. California foreclosures are concentrated in the Central Valley and the Inland Empire, residential areas lacking large job bases, where residents must drive hours to work. The overall California real estate market can recover even if these areas don't regain their former financial health.

So given all these factors, why is the stock market doing so much better than the real estate market? First, responsibility lies with the media. Three national television networks, CNBC, Bloomberg and Fox Business News, and dozens of local stations spend all day and some of the evening promoting the stock market. When on rare occasions the financial talking heads mention real estate, their comments are almost always negative -- foreclosures up, sales down, building starts weak, etc. Then the newspapers merely repeat what was said on TV.

Unlike the stock market, real estate markets are local and disparate. Real estate markets vary widely from one region to another, and even within regions, at any given time. The primary voice for real estate across the country is the National Association of Realtors, which understandably is more apt to promote home buying on a local and regional basis. All this said, just like the stock market, local real estate markets across the country almost always move as a unit in one direction or the other.

This is what is needed to get real estate moving again: first and foremost, one or more strong voices to remind the public on a consistent basis of the many good reasons to own real estate; next, more loan availability; and finally, lower unemployment.

Once these are in place and real estate is once again in vogue (think 2000-2006), watch out or you may get trampled in the rush to buy homes. Why don't you be a contrarian and do what everyone else isn't doing? Most will wait too long and pay too much. See how much better the view is when you're ahead of the pack rather than falling behind or, worse yet, getting trampled.

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