The media scares me. We all rely on journalists to make a big world small and help us digest current events, but whenever I see an article on something that is within my area of expertise – like energy policy or real estate – I’m often appalled at how badly some publications mangle the facts and principles in order to spin an entertaining story.
The worst offender among the popular press, hands down, is USA Today. Check out the feature story on Real Estate entitled Many Investors Feel Like Running Away by Matt Krantz.
If you take this article as light entertainment – kind of like reality TV – I guess an article like this might be relatively harmless. But many people go to USA Today for information – and that makes journalists like Krantz dangerous.
Where to start? Well here are some of the more egregious flaws in the article’s reasoning:
Cash in the stocks, baby, we’re buyin’ real estate! The article states that the current market is “a complete flip-flop from 2002, when investors tired of the bear market ravaging Wall Street cashed in their stocks and bought homes and investment property.” This is goofy. Smart investors might tilt their investment portfolio more heavily in one direction than the other, but it doesn’t make sense to flip your life savings from one asset class to the other in an effort to catch a hot market. Articles like this treat investing and speculating as interchangable concepts. They're not.
Taxes, toilets and tenants! For some reason, the popular press loves to exaggerate the pain and suffering that landlords go through. USA Today comments that “wannabe real estate tycoons stuck with properties they can't sell have been turned into landlords, forced to fix toilets and take tenant calls in the middle of the night.” Ok – show of hands – how many of you landlords are running out at 2 in the morning with a plunger in your hand? Note that these articles are written by journalists who don’t know anything about investing – take their advice at your peril.
Stocks have always outperformed real estate! The article suggests that real estate investors who are underwater now could have “shaved themselves some trouble if they had done some research,” pointing out that stocks have appreciated at a faster rate than real estate over the short and long term.
That's silly. The source neglects many key factors about real estate and stocks. Here's two of them:
- Leverage: the gains that you realize due to the appreciation of your real estate investment are backed by the bank’s money via a mortgage. Unless you’re a mega-aggressive margin investor, your stock portfolio is backed primarily by cash out of your pocket.
- Cashflow: The article points out that the average new home has appreciated from $4,030 to $276,400 from 1920 to 2006, a rate of appreciation that does not beat the stock market. However, this doesn’t consider the fact that real estate puts cash in your pocket. That $276k in investment properties that were purchased decades ago would be free and clear of a mortgage and would be generating from $30,000 to $35,000 per year in rental income. Compare that the dividends that an equivalent portfolio of stocks would be generating.
An interesting note: the article quotes Nigel Swaby, who’s hooked up with that iamfacingforeclosure.com guy. You’ll often see Nigel’s comments on various forums giving “advice” to investors on getting rich, but from his quotes in the article it appears that he’s sitting on the sidelines.
The bottom line: USA Today is fluff. But it’s fluff with an audience: 5.2 million daily readers. That’s a lot of bad information soaked up by a lot of people. And it’s not just the USA Today that gets basic concepts wrong; lots of other publications are just as bad. It’s up to all of us to be discriminating consumers of information.
But here's the good news - and it's something you know already. All markets are cyclical, and misinformation like this is great for spooking the herd. That can be a good thing; keep your eyes open for buying opportunities.