Here is another Yahoo Finance article, written by financial expert Stacy Johnson, that I find informative and inspiring -- especially the part about buying houses!
Because it was a very long article, I've just cut to the chase and reprinted the part about real estate here (and yes, I've got some stock investments -- old 401k accounts going almost nowhere.)
I'm not real big on stock investing, in part because real estate has so many advantages over stocks. One of the most important is, when you invest in real estate, banks (or other lenders) will lend you money to buy property. No one will lend you money to buy stocks. This is called leveraging.
Eventually, you make a profit on the appreciation -- on money you borrowed! Since you can't borrow money to buy stocks, you cannot make a profit on borrowed money in stocks the way you can on real estate.
There's a whole bunch of other great reasons to favor real estate over stocks, such as the serious tax advantages of real estate over stocks -- but the leveraging thing may be the single most obvious advantage to buying real estate over stocks.
Also note, the following article refers to house-buying as an investment. It is an investment -- a good investment -- in your long term wealth. While the article author -- and myself -- have invested in rental properties, his opinion on why now is a great time to buy real estate (even if you're buying through a Rent to Own program) still makes the same sense: Now is a great time to buy real estate!
But check out what Stacy has to say:
By Stacy Johnson
With banks paying historically low interest rates – in many cases less than 1% – they certainly doesn’t seem to be a good place for your long term savings. At least until you compare them to the stock market, where doubts about the economy are keeping prices depressed.
Then there’s housing. While prices have shown signs of stabilizing in some parts of the country, foreclosures in other parts make investing in real estate equally unnerving.
I’ve been investing in stocks, bonds and real estate for more than 30 years. For about 10 of those years I was a stock broker for three major Wall Street firms, so this is a block I’ve been around. I also put my money where my mouth is, because I disclose exactly what I’m buying and what I own.
While I can’t tell you what’s going to happen in the next few months, I’m not afraid to make some long-term bets. Nor am I afraid to show you exactly where I’m putting my money to work today.
Real Estate – My two-year prediction: Higher, especially in hardest-hit and hardest-to-build markets.
In addition to owning several houses over the years, I’ve also owned rental properties and a portion of a partnership that developed raw land. While real estate has historically averaged about the same return as stocks over the long-term, I’d guess that I’ve made more money from real estate during my investing life than I have from stocks.
Real estate is much more difficult to discuss than homogeneous investments like stocks. In other words, 100 shares of IBM is the same whether you’re buying it in Boston or Beijing. But housing markets are local. If you live in an area of growing employment opportunities, your profits will almost certainly be higher than if you buy in shrinking cities with high unemployment.
I paid $440,000 when I bought my Fort Lauderdale waterfront home back in 2001. As the market peaked in 2007, it was worth more than a million dollars. At the height of the bubble, I knew many people who were buying houses and flipping them: holding a house or condo for a few months, then selling it for more than they paid for it. The mantra at the time was “You can’t go wrong because housing prices always go up and everybody wants to live in Florida.” But I didn’t participate in the frenzy by buying additional houses. Why? Having been around the investing block a time or two, I used the same logic that applies to any investment: whenever you hear the words “you can’t go wrong” things are about to go terribly wrong. And, of course that’s exactly what happened.
My house is now worth something south of $500,000; maybe as little as I paid for it in 2001. Many friends who were speculating on housing were wiped out. Needless to say, none are buying houses today.
Too bad. Because today, buying a house in South Florida is a good idea, and an even better idea in other parts of the country.
Nationwide, we need about 1.5 million new houses a year to accommodate new households being formed and to replace old houses that are lost to fire, flood, age, etc. The annualized rate of homes being built however, was only about 700,000 in April, and less than 330,000 in May: the lowest number ever recorded and around 20% of what’s needed. Result? Sooner or later the pent-up demand for houses will materialize as higher housing prices. As to when that will occur, it will happen when the economy improves, unemployment begins to recede, mortgage money becomes more readily available, and the huge inventory of foreclosures is worked off, especially in bubble states like Florida, Arizona, California and Nevada.
What do you do when an investment with long-term promise has a short-term crash? Whether you’re talking stocks or real estate, the answer is the same: if you have long-term money available, you buy more.
As I said above, it’s possible the world has changed. It’s possible that houses will never again appreciate. That’s the guns-and-canned-food-great-depression scenario. But if you believe that housing will return to the historical mean of gentle annual appreciation in the 5%-7% range, logic would suggest that buying at 2001 prices would make a lot of sense.
I have yet to buy any more houses – the only real estate I currently own is my home and a bit of vacant commercial property in Arizona – but I’m looking into foreclosures in Fort Lauderdale. Buying real estate isn’t nearly as simple as buying stocks and requires a great deal more research, not to mention a great deal of cash [note from Happy Home Solutions -- not if you buy through a Rent to Own program!].
If you’re buying foreclosures, no mortgages are allowed; you have to write a check for the full amount. I’m simply too busy at present to devote the time necessary to buy more real estate, but then again, I’m not in a huge rush. I doubt the stock market is going to take off tomorrow – neither is the housing market.
Best place to buy a house or other real estate? In the formal bubble markets mentioned above where housing has been over-sold and foreclosures are plentiful, or in fully developed cities where employment is rising and space for new homes is at a premium, like New York City, San Francisco and Seattle.
Interest Rates – My two-year prediction: Twice as high as today.
Interest rates are historically low. As with stocks and real estate, I feel that the path of least resistance is up, especially when looking a couple of years out.
If I’m right, those predicting a double-dip recession will be wrong and the economy will continue recovering. As the economy improves, demand for loans will improve with it from all sectors: consumers will borrow for cars and houses, businesses will borrow to expand and the government will borrow to finance its ballooning deficit. Increased demand for borrowed money means higher interest rates.
If you own bonds, higher interest rates are dangerous, because bond prices move inversely with interest rates. In other words, higher rates mean bonds you own today will decline in value. You want to own bonds when rates are falling, not rising.
If you’re keeping money in the bank or money market mutual funds, higher interest rates are obviously a good thing. So if I were keeping money in ultra-safe investments like bonds or CDs, I’d resist the temptation to chase a little extra interest by investing long-term and stick to short-term savings so you’ll be ready to lock in higher rates down the road.
As with stocks and real estate, this prediction depends on the economy improving. If we’re instead on the verge of another Great Depression, interest rates will stay low or perhaps even go lower – although on many investments they’re already close to zero.
That’s it: now I’ve recorded my predictions for all the world to see. Now all we have to do is wait two years, take a look back and see if they were accurate.
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