Rent!...Don't Buy???

Thus, with home prices at record highs, interest rates now rising and lowered rental rates; renting is becoming a more compelling option for some. This is especially true for young couples, unsure about where they want to settle and how long they expect to stay in their first home.

The New York Times ran a front-page business section story this past weekend titled, “Mr. Bubble’s Worried Again”. In the piece, Robert Schiller, a Yale economist, analyzes global real estate market trends over hundreds of years. He concludes that real estate prices could fall by as much as 40% in inflation-adjusted terms, over the next generation. Shiller, as you may recall is an advisor to Federal Reserve Chairman Allan Greenspan. He is credited with predicting the stock market tech bubble and crash. In fact, many attribute the Fed Chairman’s oft repeated remarks about the “irrationally exuberant” stock market to a 1996 conversation Greenspan had with Schiller.

In another Times article titled, “In the Long Run, Sleep at Home and Invest in the Stock Market”, the writer makes the case for the superior returns of stock portfolios compared to real estate over the long run. For example, over the past 25 years, the return on the S & P 500 was close to12% per year. For the same period, homes even in hot markets such as San Francisco and New York, have risen only by 7% per year. The writer postulates that many people incorrectly overstate their profits and fail to accurately calculate the returns on their real estate investments. For example, when a homeowner sells for a large windfall, he usually doesn’t take into account the out of pocket costs related to the property. Often, substantial costs not considered include all the real estate taxes paid throughout the years of ownership, total interest paid on mortgage loans, costly renovations, repairs and maintenance.

The Wall Street Journal had a front page article this week titled “Bubble-Metrics: Economists Handicap Housing Markets”. In this article the author already assumes an imminent housing price drop and then speculates as to which markets will suffer the most. Fortunately, for most of my reading audience, the South Florida area is absent from the list. However, the Florida cities of Port Saint Lucie, Sarasota, Jacksonville and Naples all make the list. The top over-priced Cities in the list are Boston, Santa Barbara, Fresno, Nassau-Suffolk (N.Y.), Salinas and Las Vegas.

So in summary, it appears that many economists and business writers seem to be predicting an imminent real estate slump. In fact, many feel that the slow-down has already begun and give examples of deteriorating markets throughout the country.

As a private wealth-planning firm, we see and anticipate trends as they occur or prior to their occurrence, based on the behavior of our own investment clients. Anecdotally, over the past few weeks at Frye Financial, we have noticed a steady increase in the amount of new assets clients have been asking us to allocate and invest in the market. While some of these new assets are being invested simply as a result of renewed confidence in the market, much of these new assets are proceeds from recent sales of real estate investments. So, while there are certainly those real estate investors who will always ascribe to the “buy and hold “ strategy, it would appear, based upon our own experience, that we are in the nascent stages of some sort of real estate sell off. Readers should be aware that these markets and trends are subject to volatility and price fluctuation and you should discuss your own situation with your financial consultant. No one can accurately predict trends 100% of the time as markets are subject to volatility.

It was all of the above information, as well as my research into the Denver real estate market, the fact that the couple will only be living there a few years and my belief in the cyclical nature of all financial instruments, that led me to the recommendation that our newlyweds take a pass on the Denver condo----for now.

Of course, I have gone out on a limb and taken a big risk here. Should I be proven wrong, imagine the embarrassment of being fired as a financial planner by your own children!

AUTOMATIC 401K ENROLLMENT

The Department of Labor is expected to issue regulations by year’s end that will further encourage companies to automatically enroll employees in their 401k plans. Most 401k plans allow employees to decide whether or not to enroll, how much to contribute and where to invest. As a result, a significant number of employees abstain from making any election what so ever and never return their enrollment forms. The government is concerned that many of these employees are needlessly missing out on their best retirement savings opportunity and the proposed automatic feature could remedy the problem.

Employers, however, are reluctant to force employees to save and are concerned about which investments to choose for employees when they are automatically enrolled. The new rules would protect employers that use automatic enrollment from liability, as long as investments are reasonable.

Frye Financial Center maintains a full-time staff of pension plans professionals led by Robin Newman. If you have any questions on 401k plans, automatic enrollment, your fiduciary responsibilities as an employer, or any other pension plan matters, please call her.

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