Real estate and stocks

Investing philosophies in both stocks and residential real estate vary. Three of these are momentum, value, and growth investing. Understanding your own investing style could be the difference between large gains and heavy losses.

Momentum investing

When prices are rapidly rising, investors often jump on the bandwagon. Buyers who pick the right stocks see their issues soar. Those who guess wrong and select a stock that heads south, can either sell at a loss or hold until it increases. If they believe in the stock, they may even “average down” by buying more at a lower price.

Skyrocketing housing prices cause buyers concern about losing their opportunity to buy. If tomorrow’s price will be higher than today’s, it is logical to buy now. This is momentum buying in a real estate seller’s market.

The value of a stock can be assessed with certainty at any given moment. With real estate, however, market value is not as clearly determined. After you have purchased, the only way to be absolutely sure of the home’s worth is actually having it on the market again.

Those who bought in homes 1997 through 1999 paid what appeared to be a high amount, relative to previous sales. Luckily, however, prices kept climbing. When they resold, some made substantial profits. 

Conversely, those who buy a house at the top of a seller’s market and sell during a buyer’s market can end up in the red. This was true for many in our area who purchased between 1989 and 1993 and sold between 1994 and 1996.

In recent decades, our local real estate market has shown a ten- year cycle between boom and bust. Not surprisingly, buyers and sellers do not always have the flexibility to wait years for their right market.

I advise buyers in this seller’s market to consider what they will do with their home when the market drops. I suggest that, if they can, they rent out their property rather than sell at a  big loss.

Value investing

Value investors look to buy below market. Those who follow both real estate and stocks know how difficult it is to be a value investor when prices are at historic highs. 

Value stock buyers try to acquire, at reasonable prices, what they perceive to be good companies that are out-of-favor. They may also buy lower-priced firms in popular sectors.

With stocks, the companies that dominate their industry tend to have the highest present and/or future earnings. They are also likely to be expensive. Similarly, attractive homes with character in the most desirable neighborhoods are also the most pricey. 

When doing your real estate research, remember that condition is critical. A beautifully renovated property is worth more than one similar in style, size and location that needs extensive rejuvenation.

Before buying a home, compare recent home sales in the area. Make sure you or your agent have actually been inside the key comparables and know their condition and style. If this is not the case, ask your Realtor to get details from the listing agent.

Until the market changes, it will not be possible to buy in the best locations at bargain prices. You can, nevertheless, do your homework and understand real estate values before you buy.

Growth investing

Buying with the anticipation of long-term growth is the third predominant investing approach. If I had bought and held Microsoft 15 years ago, I would have profited enormously.

In real estate, being a growth investor might mean choosing an “up-and-coming” area rather than one that is already established. It could also entail buying a “fixer.” Both strategies are chancy, but could be financially rewarding if the correct decisions are made and the timing is right.

Unexpected bad news

Investors can “punish” a stock price for surprises, e.g., lower earnings than expected. Other blows could be a competitor’s strategic success, or problems for the entire industry, such as higher fuel costs for airlines.

In residential real estate, the surprise could affect the whole market, for instance markedly higher interest rates or a problem in the local economy. Sellers have no control over these issues. There is, however, one common bombshell that sellers can avoid  —  controversies over the property condition.

When a buyer discovers previously undisclosed serious problems with the home during his inspections, it invariably costs the seller money. This can be averted if the seller has comprehensive inspections of the property before it goes on the market. Despite the logic of wanting to avoid last-minute hassles, pre-sale inspections by sellers are still much more the exception than the rule.

Final thoughts

Stocks and real estate are investments. A myriad of people have made money in both without much, if any, research. They were fortunate. 

Before buying or selling stocks or a home, it makes sense to get an in-depth idea of what is happening in the market. For real estate, this involves working with a top-notch, local  agent. As the saying goes, “Chance favors those who are prepared.”

Related Articles: Paying for Perfection; Pre-Sale Inspections