Housing Bubble

Fee-Only Planners warn investors of real estate bubble 'Double Whammy'

'Money Pit Syndrome' results if investors buy real estate high before bubble bursts say planners

February 05, 2003

WASHINGTON, Feb. 5 /PRNewswire/ -- Investors who have given up after three years of down markets are likely to suffer even more losses if they shift heavily into real estate at the peak of an overheated "bubble" in that market, according to a warning issued today by BHCO Capital Management of Dallas, TX, J.E. Wilson Advisors of Columbia, S.C., and The Foster Group of Des Moines, IA. The three firms are members of the Zero Alpha Group (ZAG), a nationwide network of seven fee-only investment advisory firms managing a total of more than $1.75 billion in assets.

The ZAG members warned that a "rush to real estate" by loss-shocked investors could make a bad situation even worse. Many of the investors now contemplating a jump from stocks to a heavy (or even exclusive concentration) in real estate likely suffered major losses as a result of a lack of equity diversification and the fact that they bought in at the height of the late 1990s market. For these investors, the double whammy of the "money pit syndrome" would result if they were to suffer even deeper losses by buying into the top of a real estate "bubble" prior to it bursting.

BHCO Capital Management President Pat Beaird said: "The urge to overconcentrate in real estate that we're seeing is coming from people who are not our current clients. Instead, these are people who are flailing around without an effective asset allocation strategy in place. Investors with a long term strategy see the real estate market as a portion of their portfolio, not an alternative to it."

J.E. Wilson Advisors President James Wilson said: "People who are smarting from investment losses often fail to appreciate the importance of liquidity. If a stock is falling, you can get a price in a good market. You can rebalance your portfolio to take into account changing circumstances. Not so when a real estate 'bubble' bursts. There is no transparent real estate marketplace in which to get a good price. You are in a buyer's market where you have to take whatever price you can get -- if you can get a buyer at all."

Foster Group President Mark Stadtlander said: "Investors have to stick to their guns when it comes to the long-term performance of the market. The returns will be there over the long haul and you sometimes have to tune out the day-to-day ups and downs. What we've really seen in the last few years is the vindication of a passive (or index) approach to investing. If you don't have the diversification, the plan and the long-term view, you've almost certainly lost a lot more money than was necessary."

Advice for investors looking at real estate

The ZAG members issued the following reminders to investors who are contemplating the jump from the market to real estate:

The best long-term returns are in the stock market. If you bail out on the markets now after taking losses, you lose the opportunity that long- term investors will enjoy to ride the market back up when it recovers. According to a Brinker Capital analysis, for the 10-year period that ended March 31, 2002, the return on the S&P 500 was 13.26 percent. It was found that if you drop the best six of the 120 months in that decade, your return would have been sharply lower: just 8.29 percent.
A deliberate approach to asset allocation will beat undiversified "impulse investing." Investors who have been burned once on an impulse investment (e.g., an overconcentration in tech stocks in the late 1990s) are often prone to make another "bet it all" impulse investment in a vain attempt to make up their lost ground in one fell swoop. Unfortunately, the likelihood of getting burned twice on impulse investing is much greater than the odds of getting it right either of the two times.
If you want to invest in real estate, look at REITs as part of a balanced financial plan. According to a January 2003 report from the National Association of Real Estate Investment Trusts, a widely used index of single-family house prices gained 5.7 percent annually on average from 1976 to 2001. Equity REITs produced a 6.1 percent annual average return on a price-only basis, but posted a much higher annual average return of 15.2 percent when dividends were reinvested.
Exercise extreme caution about buying into what may the peak of the real estate "bubble." The 976,000 homes built in the United States were up 7.5 percent from 2001, according to the Commerce Department. With home prices edging up in most of the U.S., a record 68.3 percent of Americans now own homes. These figures, which are suggestive that the real estate market has heated up dramatically in recent years, are fueling worries among experts about a possible "bubble" collapse that would drive prices down.

Source: Zero Alpha Group, Washington, D.C.; BHCO Capital Management, Dallas,

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