in real estate
“Speculators
often borrowed from the
United States Bank for
speculative purposes,
sums as high as $250,000.
”
— Bull and Bear of New York
Smith, 1875
20
18
18
16
16
14
14
12
12
10
10
8
8
6
6
4
4
Since real estate bull markets can last for
decades and be experienced by many generations of investors, it is somewhat easy
to understand how today’s knowledgeable
and technologically advanced investors
bought overpriced properties with “nothing down” and indebted themselves at
lethal levels with risky adjustable rate
mortgages during the recent bull market.
As with other past bubbles, the myth that
real estate can’t lose value became a reality
for rich and poor alike, who ignored how
rising interest rates sent real estate into a
nosedive in the late 1960s and early 1980s.
History reminds us that illiquidity has
always been the Achilles Heel of housing
and makes an exit in the beginning of a
bear market problematic. Even today, real
estate is a throwback to the Buttonwood
Tree era with transactions done at a slow
pace through networks of brokers centered on MLS publications and websites
CA is a place of
“Shalfausalito,
a dozen houses, once
‘destined’ to be a great town;
$150,000 lost there — city laid
out, corner lots sold at enormous prices, ‘water fronts’ still
higher — a big city was bound
to grow up there. The old
California story — everybody
bought land to rise in value,
but no one built, no city grew
there. Corner lots and waterfronts are alike worthless.
”
— Journal of William Brewster,
1862
Fixed Mortgage Rates
1900–Present
Source: Federal Reserve
The Double-Edged Sword
of High Leverage and
Illiquidity
1900
2011
*Yearly 1900–1970, monthly after
2
that post property listings for sale. In this
decentralized, cumbersome and expensive
transaction structure, a typical transaction can take months to complete. As in
previous real estate bear markets, this one
is marked with over-leveraged properties
that are difficult to sell, and extensive government action is being used to block foreclosures and influence mortgage rates.
REITs — Wall Street’s
Greatest Real Estate
Invention
With the nation’s focus on US housing
prices’ continued decline and how Wall
Street’s securitized mortgage “creations”
nearly destroyed the world financial system, real estate investment trusts have
62 Financial History | Spring/Summer 2011 | www.MoAF.org
quietly made up most of the ground they
lost with a 70% advance since 2008 and
outpacing the S&P 500 Index’s 50% gain.
This raises a long-running debate:
Which is the best way for investors to own
real estate — direct ownership in investment properties or liquid, exchange-traded
investments that focus on real estate?
Diehard real estate investors believe
owning “brick and mortar” is the best way
to play the real estate game, and the time
dealing with the problems surrounding
the “four Ts” of investment property ownership (tenants, taxes, toilets and termites)
is the price paid for success.
Clearly, today’s investors have another
route to successful real estate investing
through real estate investment trusts
(REITs) that actively invest in residential,