There is no Wall Street In Hoboken
There was a recent article in the NY Daily News by Peter Siris, the “Guerilla Investor” to which I take exception. In the interest of full disclosure I will tell you that I know Peter because many years ago, I worked for his wife. I am sure he doesn’t remember me. Peter wrote about the difference between investing in stocks and real estate e. He starts out by saying that “there are big differences between investing in stocks and buying and selling in real estate” and then completely ignores his own statement. Peter’s argument, as I understand it, is that real estate is riskier than stocks because margin requirements force an investor to maintain a greater equity stake in stock purchases. Housing prices may continue to drop and a large number of homes may be worth less than their equity. (I take it he means that the mortgage obligation on these properties will be greater than the market value of the property). According to Peter, that may precipitate a crisis.
You Can’t Live In Your Stock Portfolio
There is a primary, fundamental difference that Peter ignores. Stocks are an investment. Real estate, for the most part, is where people live – it is their home. Investors may buy stocks hoping they will appreciate or pay income in the form of dividends. People buy real estate to have a roof over their heads. If stocks go down and the investor takes a loss it’s still purely an investment. Real estate is different. All those homeowners whose value dropped can’t just sell their homes and not have another one. They still need a place to live. If they do sell, even at a loss, chances are other properties in their community have been similarly impacted and the new property they buy can be bought at a commensurately lower price. Some may refinance and get a mortgage more suitable for their financial situation.
Investors can Rent and Profit Rather Than Sell
What about people who purchase real estate as an investment? They, too, do not necessarily need to sell and when housing prices fall rents tend to rise. Real estate investors typically earn greater rental income even when their properties value has declined. That has certainly been the case here in Hoboken.
Sellers Can Be Greedy
I recognize that there are buyers who over-reached and now can’t make their mortgage payments and may even face forclosure. It’s true that there were innocent (typically lower income) buyers who were misled by unscrupulous mortgage lenders and have had balloon payments become due or interest rates reset. How many homeowners, however, have put their homes on the market not because they must but because they are curious to see how much they can get above what they paid? When they learn that they can’t get what they had hoped for, they decide not to sell. They wait until the market improves or don’t sell at all and just keep living in their home. Not every homeowner with a drop in value is going to sell their home.
Apples are Not Oranges
There is difference between the margin requirements for buying stock and the mortgage requirements to get a home. An investor can walk away from a stock purchase and write it off as a loss. Even if homeowners have no equity in their homes, if they don’t have to sell, they haven’t lost anything. They still need a place to live. Stocks and real estate are like apples and oranges. The comparisons Peter tries to make just don’t hold.