Responding to a tumultuous economy

As I write this column, stocks appear to be re-starting their downward trajectory, with the Dow Jones Industrials having just given back nearly all their 11-percent gain from a few days ago. The Dow has sunk almost 21 percent since Oct. 1, and nearly 40 percent from an all-time high in 2007.

The stock markets are in turmoil. Stocks in the NASDAQ market continue to decline. Stocks traded on the American Stock Exchange are falling too. The S&P 500 index of stocks from various U.S. markets has fallen more than 21 percent since Oct. 1.

Whether they own large companies, small companies or no companies, most Oregonians are likely to find their wealth pinched by the current stock market stress. To make matters worse, inflation is rising, and prices for food and energy remain near historic highs. Could investing in real estate be the answer?

You might find my response unexpected—especially considering that it comes from a card-carrying member of the real estate profession. You know, one of those whom members of the public trust about as much as politicians and car dealers.

When the stock market lost almost 40 percent of its value between 2000 and 2002, a lot of investors sought refuge in real estate. Houses, apartment buildings, strip malls and more were all buoyed by investors—large and small—who suddenly decided that real estate offered a safer harbor.

That mindset is one of the several significant factors that contributed to the state of the economy we’re dealing with today. A sudden loss of interest in stocks, combined with federal policies that encouraged lax lending practices—and made money cheaper than ever—fueled an insatiable demand for real estate. At the risk of seeming trite, the problem was that nobody saw what stood before their eyes: those basic precepts of Econ 101, that inconvenient law of “supply and demand,” plus the fact that nothing lasts forever.

I can’t remember how many times I told home buyers of my disbelief at how high prices were getting.
“It’s a good thing my wife and I bought when we did,” I’d say. “If we hadn’t, we’d never be able to afford what we have today. I don’t know how our kids are ever going to be able to get something decent.”

“Yeah, I know. It’s unbelievable,” the buyer would say.

At the time, I would explain how wages hadn’t been rising as rapidly as local home prices. I would say this couldn’t last forever.

But who knew when the end would come? Economists kept talking about how, even if prices did fall some day, they would only fall a little, and the decline would be short-lived.

The decline didn’t come to Oregon till late in 2007 (about two years behind the rest of the country) but it has come. How long it will last is anybody’s guess.

Frankly, I’m not as pessimistic as some of the TV pundits. I think home prices in our little piece of paradise will continue to fall through 2009, but the picture could start looking rosier not long afterward.

Don’t look to upcoming elections for help. Which candidate wins the presidency or represents Oregon in the Senate is not likely to have much effect on how soon Oregon real estate recovers. The factors affecting the economy are far more complex than can be solved so simply.

Just like investing in the stock market, investing in real estate carries many risks. Whether an investor should dump all or most of his investments in one asset class to pool all his proverbial eggs in another is a fool’s bet.

Finally... the answer: Each investor needs a diverse portfolio that includes real estate, stocks, bonds, cash—even collectibles. Whether now is the time to pull the trigger on bolstering the real estate part of a portfolio is questionable. But the right answer varies from person to person. I’d love to share a chat over coffee and help you find the answers for you.