For now… nada - Posted by ray@lcorn
Posted by ray@lcorn on April 14, 2000 at 22:57:33:
Timely topic… (and I just emailed JP an article I wrote on this very subject this afternoon… so it’s fresh in my mind. JP can you hurry up with the proofing?
I pay little attention to the markets except in a broad, big picture way. I’ve found that it usually has little to do with my real estate, unless it displays a reaction to another, more pertinent event like war, political moves, and tax law changes.
In my opinion, the stock indices (Dow Jones Industrial Average [DJIA], NASDaq, S&P, etc.) reflect more of what has been rather than what is coming. We forget that the DJIA is made up of only thirty stocks out of over 6000 companies that are listed on the NYSE alone. Those thirty companies have changed considerably over the years, (Microsoft and Wal Mart were recent additions), and then their relative standing is altered by the daily “divisor” which itself is changed frequently, and is set by the DJIA executives. So if you added up the respective stock values of the current thirty industrials and try to gauge how much money was actually lost or made today, it would have little relation to the DJIA.
In fact, the Dow was not created as a bellwether of the economy. The media made it into that, because its a number and its different every day. Easy to report, and easy to get excited about. But the media know little about markets. They know about news. And if the Dow index is news, then they are going to push the he11 out of it. The Dow is nothing more than a means of tracking the ebb and flow of investment dollars in the market. That market doesn’t positively act, it can’t. It is a reflection of the composite actions taken across the globe by the companies whose stock it trades.
Moreover, while a 600 point drop sounds disasterous even if it was a meaningful number, it represents only 5% of the index at the present market valuation. In the smaller and more volatile NASDAQ, its ten percent drop is just another day at the office for all but the handful of probably bankrupt companies actually affected. While the media would like for us to believe that this one number, the Dow, holds our economic fate in the brink, I fail to see the import.
Look to our most recent “crash”. The 1987 drop was only 500 or so points, but represented about 20% or so of the then current market valuation. And the market gained back the loss by the end of the year in an economy just learning to deal with the 1986 tax law. That tax law did much more to affect the economy that year than Black Tuesday ever did. 75% of this nations wealth is in real estate, so when tax laws affecting that real estate changed it affected much more of the economy than the stock markets.
That being said, now I must state that there are ramifications to real estate from a volatile market, whether going up or down. Moves in the market of 15-20% or higher are cause to pay attention, something big is happening. But it is not the market making the event. It is the market responding to an event.
Money doesn’t care who owns it, but it hates instability or uncertainty. Given a choice, money will choose a safe harbor in a storm. So when markets get wild, or war breaks out, or a country like Russia falls apart, money will flee to the safe havens until the storm dies down. This is where it starts to affect us in real estate.
In our current world, one of the safest investments anywhere is arguably the US T-Bill, aka Treasury Bonds. At some point in any chaotic or crisis event such as the Asian meltdown in 1998, large chunks of money will begin to move to safety. As that happens, bond prices will rise and their yields will fall. Most of our large mortgage markets are tied to the price and yields of T-Bills, often quoted as a “spread” over a certain termed T-Bill. As those bond prices rise, mortgage money begins to cost more. That affects real estate. In the most dramatic of scenarios, a rising rate environment is good to rental housing and bad to home sales. So you have to pick which sector of the market to play when the conditions are right for that sector.
Given what has to happen to really move rates by forces out of our control, I don’t think much of a 5% drop in the Dow. Nor does the tech stock flame out bother my properties or my sleeping habits. In my estimation most of those stocks have been very overvalued for a very long time.
On a local level, and remember folks, ALL real estate is local, I don’t expect any changes except that there may be some extra money looking for a safe home next week. If you have a cash investor network that you work with regularly, then you may get a call wanting to place some funds next week. If you’re ready, then you’ve already got a place to put it to work for it’s owners. If you’re not ready, why aren’t you? If you can create a stable, low risk, investment secured by real estate with a decent return for an investor, then why would he have to play markets unless he just doesn’t know about you?
Do you think there might be some money to be made here?
my two cents,