- May 4, 2024
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Buy 10,000 shares of Microsoft for $30.25 per share, and it’s reflected instantly on trading boards around the world. Buy an existing home for the same $302,500 and the result isn’t made public until long after the sales contract is signed, probably two months later. Imagine investing that much money in a stock knowing only what it was selling for two months ago.
In the housing sector, critical information is delayed. Regulations and statutes prohibit releasing the actual selling price before the closing. If you’re not plugged into MLS data, as I am, you might have to wait a few more weeks until the sale is reflected on the clerk of court’s website.
Sellers set their asking price based on comparable sales in the area. This information is dated and, in a volatile market, it’s misleading. It’s hard to set a selling price when you don’t really know what a comparable home is selling for today. Buyers are as much in the dark as sellers.
The stock market is liquid. The housing market is not. Try asking your real estate agent to sell your house at the “market price” tomorrow morning. First, you have to do the listing agreement dance to select an agent and set the asking price, followed by days, weeks or months of showings with, perhaps, a price change or two thrown in. Next are the negotiation and contract followed by weeks of uncertainty over the appraisal, mortgage commitment, inspection and repairs. Once you decide to sell a house, the proceeds may be unavailable for months or more.
And if the home is underwater, it’s not liquid at all. If you’re making the mortgage payment and preserving your credit rating by not doing a short sale, you are locked in place unless you can come to the closing table with enough cash. Today’s home inventory shortage is due largely to this conundrum.
While the housing market is less volatile than the stock market, regulations limit the amount of leverage available in the stock market. You cannot, for instance, buy stock using a no-down-payment, interest-only loan with an artificially low front-end rate. The potential price decline in real estate has traditionally been less than with stocks, but we’ve been taught recently that this is not always true. Home values declines of 50% have been common. Condominiums have dropped as much as 70% and lots by as much as 90%.
We have learned that the combination of illiquidity with the exotic loans favored by many real estate investors created an enormous exposure. Don’t invest in real estate if you think it’s a short term investment.
