Young Professionals Still Believe In Real Estate

My friends still believe that if you have the opportunity to own your own home/apartment, you take it.  They have been taught their whole lives, owning your own place is a must, renting is tantamount to throwing away money.  I find it really interesting that the recent real estate crash has done little to nothing towards recalibrating this belief.  My friends, mostly young professionals living in metro areas, still think that real estate is a no lose situation.

In many ways they feel the same way about stocks.  Again, they’ve been told their whole lives that if you invest over a period of time, the market will reward you for being involved.  I cringe when they say this, and I’m still shocked that even after seeing in some instances their parents lose their homes and their retirements in the market, they still have unwaivering faith.  And in some cases they are extremely bullish on both, not because they believe in any number of fundamental factors which will contribute to the appreciation in price of these assets, but simply because, the market goes in cycles and everything comes back eventually, buy low and sell high right.

I want to puke.

Specifically real estate seems to be this magical asset class that always makes sense investing in.  NYC real estate will never go down they say, and it’s always easy to sell your apartment here.  Tell that to the developers of all those far west side apartment buildings which never sold and are now rentals.  The developers couldn’t sell them at market rates, and still can’t, they would be buried by losses on those projects.  Instead, they convinced the banks which had backed them originally to ante up more capital to keep them afloat while they turned the units to rentals, hoping that when the market allows they would convert back to condos.  The banks had to go along with the plan, else their original loans would be near worthless.

Specifically in this situation you have a huge phantom inventory on the market.  If the current inventory estimate is between 9 months and a year, the real inventory is somewhere between 2 and 3 years.  And the second the market turns around in NYC, you will see every developer rush to exit his underwater positions.

But let’s forget about the specific situation here in NYC.  I want to focus on why my young professional friends seem to believe that real estate is a no lose situation.

Most of my friends have taken a finance class.  But none seems to understand that real estate is just one of any number of asset classes you can invest in.  They don’t seem to realize that you could take the down payment you were going to put on that house, and invest it in another asset which could have a better opportunity to appreciate.  This is such a weird concept to them, even though buying real estate is such a difficult process.  I mention buying a REIT to them and they look puzzled, isn’t that a stock?  Well yea, but it’s in the real estate class, and you can choose a REIT based on geographical ownership of property.  You can live in one place but invest in another, isn’t that cool?  They continue to look puzzled.  You can get in and out any time you want with little cost and hassle, still puzzled.

They don’t seem to understand as well that property taxes in NYC and surrounding suburbs are sky high, and that unless you’ve got kids going to great public schools like I did in Chappaqua, NY, you’re wasting money.  Still puzzled, they don’t seem to understand that you have to factor taxes and maintenance into the cost of living in the apartment.  They look at the mortgage and say, hey look it’s cheaper than renting.

Real estate can be a great investment, especially if you’re planning on sending your kids to great public schools and staying in your home for a long period of time.  But real estate should be treated like any other asset, you don’t buy bad assets in bad markets unless you’re a true value investing expert.  None of my friends are.  Real estate is one of many different asset classes you should be looking at to invest in as a young professional, but should put it on equal footing with all others.  Our parents were taught that owning real estate was the path to wealth creation, that worked out real well didn’t it.

I hope my friends learn this lesson sooner than later.  I fear though that no one ever learns the lessons of the past generation, even if they were greatly effected by it during their youth.

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