Real Estate – Why Are We Obsessed?

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Real Estate – Why Are We Obsessed?

Real Estate: these two words used to be presumed synonymous with guaranteed investment return. The absolute thought of losing money in real estate historically had been considered virtually impossible: until recently, that is. The economic and psychological events of present times have all contributed to the spiraling downfall of home prices, the drying up of available credit for consumers, and the collapse of many banks and financial institutions. More than perhaps ever before, credit repair, debt consolidation and/or debt settlement are critical actions for less than “A” credit consumers that are preparing to enter the real estate market.

So historically why have people always seemed to have such inspired confidence in real estate investments? Ownership of property has always been a primary indicator of wealth; this stems back to very early times in world history. Wars have been fou ght over acquisition of land; it is a status symbol, a perceived measure of an individuals worth, perhaps even more so than gold or precious stones. It is rooted into our society; home ownership in our country is frequently referred to as “The American Dream”. Why invest in real estate over the stock market? In general, the rates of return on real estate investments tend to be more stable than the stock market, which has put investors through a dizzying roller coaster ride made up of swift highs and abrupt lows not just in the last month, but throughout history.

Between 1926 and 1996, the annual average rate of return on real estate was approximately 11%, while inflation held fairly consistently at 3%. If we compare this with the rate of return for the Dow Jones Industrial Average over the same period, it was slightly lower at 10%. Based on these indices, the suggestion is that real estate investments have historically been similar to the stock market, but without the same volatility.

We all are painfully aware of what happened during the housing bubble in the early to mid 2000’s. During this period, no matter where you went people were talking about real estate, and investors were pouring money into real estate as if it was impossible for values to go down. While there are many reasons the U.S. experienced probably the greatest national real estate boom in our history, one key aspect of the boom was the “psychology of the masses”. It’s a bit like the lemmings that all follow one another jumping off the cliff; usually not a happy ending.

So here we sit in late 2008, waiting to see how the story unfolds. Although there is currently a housing crisis in certain areas of the country, every indicator points out that what we are really experiencing is a necessary readjustment of highly inflated real estate prices. Just as prices may be dropping, in time they will undoubtedly increase; if you wait for the cycle to reach a predicted bottom, you may miss the boat. Regardless of what type of market we are in, it is clear that an investment in real estate guarantees a profit over time. Don’t expend countless hours timing the market; the simple rule across all investment markets, including real estate is “Buy low, sell high”.

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