Investment U

“You Can’t Go Wrong In Real Estate?”
The Investment U E-Letter
Monday, October 18, 2004

By Dr. Steve Sjuggerud
President, Investment U

I’ve heard it time and again: “You just can’t go wrong with a real estate investment on our island.” And if you’re just looking at the last eight years or so, it’s true.

Two new things I heard this weekend:

1. “Paul bought his beachfront shack for $25,000. It just appraised for $1.3 million.”
2. “I should have bought that lot (with no road access) for $60 grand a couple of years ago. The old lady wants $250,000 for it now.”

If Paul’s house is worth that, then beachfront homes in my area are up about 40% in the last year and a half.

Is it Miami’s boom all over again? I sure hope not

Quick quiz for you What year was it? Miami had 25,000 realtors, the price of a beach lot was $800,000 (in today’s dollars), and a summer issue of the Miami Herald was over 500 pages? Believe it or not, it was the summer of 1925.

South Florida’s real estate boom in the 1920s ended very badly. Some coastal real estate in Florida today bears a resemblance to the 1920s boom, and even to the tech stock boom of the late 1990s.

My real estate investment advice? The lesson is as it’s always been: When everyone thinks “you can’t go wrong” the end is near.

“I’m In Real Estate”

On my island here in Florida, whenever you ask well-off folks around here what they do, they all say the same thing: “I’m in real estate.” The truth is, nobody’s talking stocks anymore.

If you’re not “in” real estate, you’re supporting the real estate business around here contractors, banks, architects, builders, etc. Outside of tourism, there is no other business here. Just like Miami in the 1920s.

“But wait a minute, Steve,” you might be thinking. “Haven’t you been telling us that real estate in America isn’t necessarily overpriced?” Yes, that is correct. Generally, nationwide, I don’t think real estate is in a bubble.

But there are some specific markets, namely coastal markets, that bear the hallmarks of past bubbles. And that’s reason for concern.

South Florida’s bubble in the 1920s ended quickly. In the fall of 1926 two hurricanes came. On September 18, 1926, 400 people died and many thousands were injured, as the hurricane ripped roofs off of houses and tossed elegant yachts into the streets of Miami.

That was that.

Oceanfront lots probably didn’t hit $800,000 in today’s dollars in South Florida again until the 1980s so it would have taken at least 60 years for someone who bought at the top to break even.

The thing about bubbles is, you never know when the top is in. Prices can go much higher from here. It “feels” like Nasdaq 4,000 right now here on my island we’re not far away from the peak of Nasdaq 5,000, when everyone knew they were going to get rich in stocks.

But you can’t know.

Unfortunately for the “I’m in real estate” crowd on our island, the lesson of the Nasdaq is not pretty It’s five years on, and the Nasdaq is still 50% below its peak People who thought they could retire on their stock portfolios have literally lost millions.

Is It a Boom or a True Bubble…?

It’s difficult to put it all together Much of Florida’s real estate is still attractively priced, relative to the rest of the nation, the world, and even other asset classes. Yet coastal real estate here clearly bears the hallmarks of a bubble, as you run into “I’m in real estate” guys at every turn. Quite frankly, I’m still sorting this one out

Times change, but the lessons of investing stay the same. And when everyone is doing the same thing (when everyone on the coast says “I’m in real estate” in this example), history tells us the gains have already been made. That the risks probably outweigh the rewards. This is “real” real estate investment advice.

“What’s your new neighbor on the beach do Steve?” Someone asked me this week. Before I could answer that I didn’t know, someone else chimed in “Oh, she dabbles in real estate.” I should have known

Today’s IU Cribsheet

• What works in investing hasn’t changed you buy something with extraordinary intrinsic value as cheaply as possible, when nobody else wants it. That’s how you make money. By that standard, it’s likely time to look elsewhere than the beachfront for a while as you can’t know when the top will finally arrive.
• http://www.Realtor.org is a good site for real estate research and real estate investment advice and tips, and http://www.Realtor.com is a good place to check out what homes in your area are selling for now. http://www.BankRate.com is also excellent for home / mortgage news, calculators, and rates.

Good investing,

Steve

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