Young Professionals Still Believe In Real Estate
- Posted by Leigh Drogen
- on March 18th, 2011
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.
Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see the Disclaimer page for a full disclaimer.
blog comments powered by Disqus
Leigh Drogen is the founder and chief investment officer of Surfview Capital, LLC, a New York based investment management firm employing an intermediate term long/short momentum strategy. More »
- Will Automation Make Africa The Lost Continent
- My 2015 Stock Picks and Big Trends
- Is Israel In Danger of Being Destroyed?
- Review Of My 2014 Picks and Trends
- The Most Powerful 27 Year Old In Finance?
- You Won’t Believe What This Asshole Said About Yo
- Deltix Publishes Quant Strategy Using Estimize Data Producing 28.5% Cumulative Market Neutral Returns
- Here’s Why Airbnb and Uber Should Completely Ignore Government Regulations
- Beware The False Promises Of Quant Nirvana Behind New Financial Products Like Kensho
- My 10 Stocks and Big Trends for 2014
- January 2015
- December 2014
- July 2014
- June 2014
- December 2013
- November 2013
- October 2013
- September 2013
- August 2013
- July 2013
- June 2013
- May 2013
- April 2013
- March 2013
- February 2013
- January 2013
- December 2012
- November 2012
- October 2012
- September 2012
- August 2012
- July 2012
- June 2012
- May 2012
- April 2012
- March 2012
- February 2012
- January 2012
- December 2011
- November 2011
- October 2011
- September 2011
- August 2011
- July 2011
- June 2011
- May 2011