503-785-3485
bill@conerlyconsulting.com
  • Facebook
  • Twitter
  • Linkedin
Conerly Consulting Conerly Consulting
  • Consulting
    • Approach/Philosophy
    • Sounding Board
    • Economics and Business Strategy
    • Assessment
    • Case Studies
    • Testimonials
  • Speaking
    • The Package
    • Topics
    • Testimonials
  • Writing
    • Businomics Newsletter
    • Businomics
    • The Flexible Stance
    • Blog
  • Industries
    • Banking/Finance
    • Manufacturing
    • Other Industries
  • Video
    • Speaking
    • Event Promotion
    • Business Planning
  • About
    • News Coverage
  • Contact
  • Consulting
    • Approach/Philosophy
    • Sounding Board
    • Economics and Business Strategy
    • Assessment
    • Case Studies
    • Testimonials
  • Speaking
    • The Package
    • Topics
    • Testimonials
  • Writing
    • Businomics Newsletter
    • Businomics
    • The Flexible Stance
    • Blog
  • Industries
    • Banking/Finance
    • Manufacturing
    • Other Industries
  • Video
    • Speaking
    • Event Promotion
    • Business Planning
  • About
    • News Coverage
  • Contact
  • Home
  • Investments
  • Don’t Buy More Real Estate

Investments

10 Apr 2007

Don’t Buy More Real Estate

  • By Bill Conerly
  • In Investments
  • 1 comment

The Wall Street Journal had an article today saying "Why Investors Should Consider Real Estate."  That’s good advice for one or two of you.  The rest should burn the paper.

First, here are the basic facts about real estate and stocks:  Real estate returns have been almost as high as stock market returns over the long run.  The variance of real estate returns is roughly equal to the variance of stock market returns.  (Real estate may appear more stable, but that’s a false impression, due only to real estate’s lack of liquidity.  If you could trade the corner retail center on a stock market, it’s price would fluctuate as much as any stock price.)  Real estate returns are loosely correlated with the stock market, but far from perfectly correlated.  The implication is that an efficient portfolio should have some of both.  Because of the lower average returns to real estate, it should have a lower allocation to a portfolio.

The numbers are open to discussion, based on the time periods over which the returns, variances and co-variances are estimated.  I urge real estate on people whose holdings are less than 20 percent of total assets; and discourage real estate from being as much of half of assets.  So 20 to 45% of your assets in real estate is OK.  Small deviations from ideal are not too bad.

Now let’s look at actual holdings, turning to the Federal Reserve’s Survey of Consumer Finances.  Sixty-nine percent of all families own their own home.  Only 21 percent of families own stock.  For the middle quintile (percentiles ranging from 40th to 60th), the median stock holding of families that own stock is $12,000.  The median primary residence value for families who own their home is $135,000.  (These are 2004 data; they seem low to me, but they include plenty of older housing in the Midwest and south.)  So the median holdings are vastly overweighted toward real estate.

Moving to the highest income quintile, stock holdings are quite a bit larger.  Fifty-five percent of top-quintile families own stock, and among the stock-holders, median value of stocks is $57,000.  But 95 percent of these families own their own home, with a median value of $450,000.  If we just consider the home and stocks, the top quintile is hugely overweighted in real estate.   In addition, 37 percent of the top quintile own other residential property, and 21 percent own non-residential property.  The median values for these holdings are $268,300 for other residential, and $189,000 for non-residential.

If you are anywhere close to typical, you have WAY TOO MUCH REAL ESTATE.

Note that we don’t care how much equity you have in your home.  Your net worth is influenced by the total asset you own.  For instance, suppose that you own a $400,000 home with a $300,000 mortgage, leaving $100,000 in equity.  If home prices in your neighborhood go up by 10%, tell me how much your net worth rises:  10% of $400,000 or 10% of $100,000?

So who should be buying more real estate?  If you really love stocks, and have been loading up on stocks to the neglect of real estate, OK, consider it.  But if you own a $500,000 home and no other real estate, I’d like you to have $2,000,000 in stocks before you buy any more real estate.  If you have a $500,000 home and a $300,000 beach house, then don’t add more real estate until you’re well over $3,000,000 in stocks.

For the one or two of you who need real estate, here’s how to do it.  I assume that you are not inclined to be a do-it-yourself landlord.  (If you had that inclination, you already would own too much real estate.)  REITs are easy to invest in, but their returns are not taxed at the low rate of dividends and capital gains.  If you have an IRA, load up on REITs within the IRA.  Everything coming out of the IRA will be taxed at your regular rate; no benefit for capital gains and dividends that are earned inside the IRA, so you might as well have your high-tax-rate income there.  Don’t worry about the IRA being diversified, so long as your total holdings are diversified.  If you can’t get all the real estate you want in your IRA, see if you can add a REIT mutual fund to your 401(k).  If you have a 401(k) from a former employer, you can roll it into your IRA to get more investment choices.

  • Share:
Bill Conerly

    Comments

  1. Ruben A
    April 10, 2007

    In the returns you projected, did you actually take into account the fact that most real estate is purchased with leverage? You can’t leverage stocks the way you can real estate. Will the bank lend you 80% of the value of a stock so you can purchase it as an investment? And there is a much greater ability to control real estate than there is with stock. If a stock doesn’t perform, you can sell it, or buy more of other stuff to diversify. But you certainly can’t change the way the company does business in the stock you own. All the contrary with real estate.
    Also, your article only addresses one type of ownership in real estate, and that is the type used as a residence. If you are to compare real estate with stocks as an investment, you can’t simply eliminate investment properties into your equation. You can own and control real estate investments, but renters pay your bills for it.
    Regardless whether a person goes real estate or stocks, they will always need to do the leg work in order for them to make a return, otherwise, the only ones making the money will be the stock and real estate brokers.

Comments are closed.

Search

Sign Up For Our Newsletter!

View Latest Issue

RSS Bill’s Forbes Articles

  • Inflation Has Not Shown Up Yet, But It’s Coming February 25, 2021
    Inflation is muted, but not for long. Inflation is coming in the next two years, then will be followed by a boom/bust business cycle, or maybe two.

Testimonials

Dr. Conerly’s presentation and view of the economic conditions impacting the world of business is insightful and thought-provoking. His analysis and presentation style is audience focused and engaging, leading to the efficient development of follow-up activities by those in attendance.
Paul Ulrich, The Inteplast Group (plastic bags)
Bill assisted O.B. Williams Company with developing a strong business plan that we implemented 18 months ago. As a result and together with Bill, we are improving our position within our highly competitive market segment.
David Wick, CEO, O.B. Williams Company (wood products)
Thank you for a wonderful presentation. Everyone who heard your presentation was impressed with your analysis, and strong command of facts and theory. More importantly, your ability to weave together substance with humor, in a very dynamic way, meant our attendees learned and retained more information than we would have typically expected. You made economics fun and you left our members with powerful insights on trends and issues to consider as they prepare for the future.
John Aguirre, Oregon Association of Nurseries
Bill did a great job. We look forward to a continuing relationship.
John Hamburger, Franchise Times
You made a complicated global picture understandable. I have received many favorable comments from those in attendance. I frequently heard comments like ‘Now I understand’ or ‘Wow, now I get it’ and ‘He was great to listen to. Thanks for bringing Bill to our meeting.’
Pete Van Sickle, Idaho Department of Lands
We asked Bill Conerly to look at one of the major factors limiting the growth of our business. He pulled together data from a wide range of sources, as well as his own extensive business knowledge, to give us an insight into when conditions would improve and how we could be ready to capitalize on better times. He did so in a straight forward, easy to understand manner. A year later it was clear that things had evolved just as he had forecast. Ever since then he’s been my go-to guy on how the e…
Len Ludwig, former CEO, Vencore Capital LLC
Bill is a delight and easy to work with. The client thought he was great and delivered value to their group. I would definitely recommend Bill.
Andrea Gold, Gold Stars Speakers Bureau
AgFirst Farm Credit Bank has benefitted from Bill Conerly’s unique insights and perspectives several times over the past five years…his materials consistently cover the points that we agree on…he has been very well-received by our groups, and we look forward to having Bill with us again in the future.
Ronnie Hucks, AgFirst Farm Credit, Columbia
It can be difficult to find economists who provide good substantive information who are also entertaining and engaging. I received many enthusiastic comments about Dr. Conerly from members and others in the audience.
Molly Steckel, Idaho Telecom Alliance
The ratings you received from our banker evaluations were among the highest I’ve seen, which matched my impressions exactly. Your presentation style is quite engaging, you bring interesting and valuable content, and our ability to interact in a stimulating way during “Q&A” sessions makes you a valuable addition to any meeting agenda. As a bonus, you are a genuinely enjoyable participant in conference activities beyond your presentation.
Steve Yeakel, Montana Independent Bankers

Get in touch

(503) 785-3485

bill@conerlyconsulting.com

PO Box 2188
Lake Oswego, OR 97035

Useful Links

  • Consulting
  • Speaking
  • Videos
  • Blog
  • Press
  • Contact

Social Links

  • Facebook
  • Twitter
  • Linkedin

Newsletters

Copyright 2020 Conerly Consulting LLC