By Jodi Summers
“Look at the stock market versus what’s going on in the real economy — Main Street versus Wall Street,” commands William C. Dunkelberg, professor of economics at Temple University. “We’ve lost some $7 trillion in market cap since the peak, but we made up a little more than $5 trillion in home appreciation for consumer portfolios. This makes consumers more confident about wealth accumulation through their homes than they are through Enron stock.”
Recent history has shown that portfolio diversification has been crucial to most successful retirement accounts. Since the turn of the millennium, stocks have taken a nasty hit. According to Standard & Poor’s 500 index, stocks are down about 38 percent from its high of just below 1,528 in March of 2000. In the meantime, the California real estate market in April 2003 set another new record for the median price that Southern California buyers paid for a home — $307,000, up 19 percent from $258,000 for April 2002.
“What has happened is the stock market has declined in the past two years and that has pulled the wealth factor out of the market. Now, the only thing that’s working is the real estate market,” observes investor Fran Flanagan. “You’ve got an interesting change. It used to be that the stock market and the real estate market went together, but this time it didn’t happen. The real estate market is strong right now, people’s wealth is in their homes, not in their portfolios.”
“What has happened is the stock market has declined in the past two years and that has pulled the wealth factor out of the market. Now, the only thing that’s working is the real estate market.” — — FRAN FLANAGAN Investor
Real estate security goes beyond current record low mortgage rates. You need to factor in the rental market. Residential space is relatively scarce and rents are rising fast in the Los Angeles area. According to RealFacts, the average Los Angeles County monthly rent for all apartments rose from $1,254 in June to $1,295 at the end of October 2002. In Santa Monica the average rent grew to $2,487, while you could find rents from $500 to $700 in El Monte and Compton.
DataQuick reveals the average mortgage payment in Los Angeles County is $1,179 a month. If you can swing the down payment, in the long run it’s cheap-er to put equity into something you own than to rent.
“Sooner or later, stocks will come back, but interest rates won’t remain this low,” observed financial planner Delia Fernandez.
Fernandez offered the L.A. Times a fine comparison of stock market investment versus real estate investment: In one scenario, a person takes a cheap apartment or gets a roommate and is able to put $700 into a CD at the beginning of each month. After 10 years, at 5.3 percent interest, the renter would have $110,948. But because taxes will eat away at his savings, he needs to save $1.27 for every dollar he ends up with.
In the another scenario, a person buys a $250,000 house. Assuming a conservative 3 percent inflation rate, the home would be worth $335,979 in 10 years. Because the homeowner was spending down the mortgage, he would likely gain an additional $30,000 in equity. The house, with all its tax deductions, would make him as much money as the CD, without the roommate. Because of government incentives, he only needs to put away 72 cents to make a dollar, “Tax deductions on housing are the No. 1 gift Uncle Sam gives us,” concluded Fernandez.
Currently, around town, home supplies are tight, mortgage rates are low and the population keeps growing — leading one to conclude that prices should continue to rise.
“I’m surprised that people think there is so much risk in the market,” noted DataQuick Information Services housing analyst John Karevoll.
“The day after the earthquake, if we could have sold fast, real estate prices would have gone through the floor,” Flanagan concluded. “But we can’t sell fast, so real estate is a stable market. It can’t bomb overnight.” (If you have local real estate questions, please e-mail them to Jodi Summers at, or call at (310) 309-4219.)
Originally published in the Santa Monica Daily Press print edition on June 13, 2003. Read the original PDF.