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Tiptoeing out of Real Estate

Why "tiptoe?" You don't want to make too much noise as you divest "the best single investment any individual can make." The problem with real estate, especially residential real estate, is that it was a good investment. So good that everyone tried to buy a piece of real estate during the '70s. Houses were bought and sold with the grace and alacrity common to a fruit stand. People bought "up," bought "across," people bought because their old house had too much equity, and people bought because they didn't have any equity at all. Condos, timesharing, duplexes, townhouses. You couldn't go wrong.

The problem is that this five-year feeding frenzy has just about exhausted the supply of capital available to loan out to buyers for mortgages. During the past few years, Americans have shifted their money away from 5VA% accounts at the S & L (Savings and Loan) to T-Bill (Treasury Bill) certificates and money market funds yielding close to the prime rate. At these rates, S & Ls can't make mortgage loans, and many have stopped. So mortgage money is hard to get or real expensive. Part of the reason that buying made sense was that the interest on the mortgage was small enough to justify the purchase. It was like rent. But now with 16% mortgages (if you can get one), iterest on a $100,000 mortgage amounts to big bucks. When you throw in taxes, insurance, principal, etc., it could cost $1500 to 1600 per month to "own" a $135,000 house after putting $35,000 down. That's a hard sell when the house rents for half as much. But if you believe real estate has nowhere to go but up, why not?

The best example is my own house. It is a nice three bedroom converted music house once attached to a Victorian on the corner. We paid $S0,000 for it some four or five years ago, and now it will sell for nearly $300,000. Since we owe $58,000 on it, we have nearly $240,000 in equity. We rent it out for $600/month and hassle with the leaky toilet and the old plumbing. My contention is that real estate has sort of leveled off. It won't grow in leaps and bounds because it is so dear to buy, expensive to own, and only economic if it keeps going up in price. But now that the means (inexpensive mortgages) are gone, it will be nigh impossible for real estate to achieve the same rate of appreciation. In fact, it could easily do the opposite. For someone like me, the best place to put $240,000 is not in a house, but in a savings institution where it will earn 15% because it has been loaned to someone who is paying 16% trying to buy a house. I would be getting $36,000 a year instead of $7200 and would not be paying any mortgages or taxes either. And the toilet wouldn't be leaking.

We didn't buy it to make money, so we won't sell it for that reason either, but the point is the same. Real estate at present-day prices is not economical, and as people finally figure that out, it will go down in price until it is economical. If everyone figures it out at the same time, it will go down fast. That's why it's best to tiptoe.