RYAN TATE
CLIP
From Contra Costa Times
Friday, July 12, 2002
(page A-1
)
Swapping stocks for real estate in shaky times
The unstable economy finds some looking more to tangible investments
By Ryan Tate
Times Staff Writer
Antioch real estate agent Mark Pryor was more than a little shocked when a recent client dumped his stock holdings and house in Silicon Valley and plunked down $475,000 for a new home in east Contra Costa--a home he planned to leave entirely vacant.
Shaken by the twists and turns of the stock market, the buyer was interested in the 3,600-square-foot property only as an investment.
"I have not seen a market quite like this in the last 22 years," Pryor said "Buyers have already looked at their stock portfolio and what's going on in their pension fund -- and looked to the local real estate market as a place to park their returns and get funds for the future."
Pryor's experiences are part of a larger trend, at least according to a study released this week by the Milken Institute, a Los Angeles-based economic think tank chaired by former junk bond financier Michael Milken.
The study found that residential real estate has become the "investment of choice" for times when the economy is in chaos, a tangible, safer-feeling investment.
With the S&P 500 stock index off 38 percent from two years ago and in the wake of several high-profile corporate accounting scandals, people seem to be looking for such an investment right now, much as they looked to gold in decades past.
That could help explain why the median price of an Alameda or Contra Costa home jumped 11 percent in May compared to the year before, according to statistics released Thursday by the California Association of Realtors
"There was certainly talk when the stock market was doing so well that people, particularly younger investors, were moving away from real estate and saying it just didn't appreciate the way stocks did," said Cynthia Kroll, a regional economist at the Haas School of Business at UC Berkeley.
"Certainly what's happened with stocks is maybe enough to make them reconsider that."
The Milken Institute study found that real estate and stock investment began moving in opposite directions starting around 1980, where before they had moved in tandem.
That's partly because a 1980 federal policy change tied interest rates more closely to the market, bringing more reliably lower rates during economic downturns and thus making mortgages cheaper. But the study says psychology was at work, as well.
"During times of economic uncertainty, investors seek assets that 'feel' secure," it reads. "Real estate has replaced gold as the 'feel good' investment, because it is literally as solid as the ground upon which we stand. Unlike business equity, real estate is a high-touch investment." The emotional attractiveness of real estate could be fleeting, however, making that market all the more volatile.
Susanne Trimbath, a research economist and co-author of the study, says that while there are plenty of rational reasons to buy a home in many areas right now, investors should not continue to look for the high returns of recent years.
"You're not going to get these stupendous rises forever," said Trimbath. Instead, residential housing will probably continue to appreciate at a rate closer to 5.6 percent, the average over the past 25 years.
Of course, the price of an individual home can fall or rise dramatically, particularly over the short term. "You do have a problem where people in a region could misjudge the value of their underlying economy -- say, if your economy is tech-based," said Trimbath.
An area such as San Jose, which is fairly dependent on the technology sector, faces more potential volatility than one such as Contra Costa, which has a diversified local economy and residents employed throughout the Bay Area, she added.
Whether disgruntled stock investors continue to add heat to the sizzling real estate market remains to be seen. Pryor, the Antioch agent, is keeping his eye on local transportation issues, worrying that worsening traffic jams through the Caldecott Tunnel could slow his sales.
And Kroll said she has not seen enough hard data to say whether falling stock prices helped to trigger the most recent housing run-up in the first place.
Even if it did, she agrees with Trimbath that the housing market could be due for a correction. "It's not sustainable," she said.