Overall investor optimism remains near its lowest levels of the past two years
GALLUP NEWS SERVICE
PRINCETON, NJ -- Back in the boom days of 2000, dot-com stocks were the topic of choice not only on most business shows but also at many investor cocktail parties. Today, the subject of discussion has shifted to the booming real estate market. And, as was the case during the dot-com boom, the debate among pundits and investors alike seems focused on whether the surge in real estate prices is due to economic fundamentals, or is instead a speculative bubble.
Regardless of who eventually turns out to be right, one thing is clear: the majority of investors seem to feel that real estate is a better investment than stocks -- at least in the short term -- according to the June UBS/Gallup Index of Investor Optimism poll. Investors not only expect real estate prices to keep going up, but also say investing in real estate is both safer and more profitable than investing in stocks.
Home Price Expectations
Nearly two in three investors say they expect home prices to increase over the next three to six months. This holds true for average as well as substantial investors, for men as well as women, and for younger and older investors.
The Safer Investment
Roughly three in four investors feel that real estate is a safer place to invest than the stock market over the next three to six months. Once again, this holds true for average and substantial investors, male and female investors, and younger and older investors.
The More Profitable Investment
About two in three investors -- whether young or old, male or female, average or substantial -- believe that real estate will be a more profitable investment than the stock market over the next three to six months.
Investor Optimism Remains Weak
Investor optimism increased slightly in June, according to the UBS/Gallup Index of Investor Optimism, moving from 50 in May to its current reading of 54. More significantly, investor optimism continues to be very weak, with the Index remaining near its lowest level of the past two years.
The Magic of Leverage
Why are real estate investments so attractive to investors? In part, it has to do with the combination of a surge in housing prices and low long-term interest rates. Another factor is the relatively low rates of return that other investments like stocks, bonds, and savings deposits are providing. Still, the most attractive aspect of real estate investing for many investors may be the leveraging it provides.
In many ways, investing in real estate is a lot like buying stocks on margin. For example, suppose an investor buys a house for $200,000 and makes a down payment of $40,000, or 20%. If the house increases in value by 10% in a year and the investor sells the house for $220,000, he makes $20,000 on his $40,000 investment, for a one-year rate-of-return of 50%. Of course, in many housing markets, housing prices are increasing a lot faster than 10%, and many investors are putting down a lot less than 20% to invest in them. As a result, their rates of return are much greater than in the previous example, even if the costs of the sale are included.
Given such potential returns, it should not be surprising that the National Association of Realtors reported that nearly one in four homes purchased last year were bought by investors instead of by families planning to live in them.
Over the past several years, increasing housing and real estate prices have created a great deal of wealth for many Americans. Mortgage refinancing and home equity loans/lines have allowed the consumer to draw on this increased wealth to continue spending even in the face of slowing income growth.
Given the current level of investor optimism about real estate prices, continued low long-term interest rates, and today's relatively liberal underwriting standards, it is hard to argue that the current real estate trends are going to change in the near future. In this context, the current lack of concern among investors about the potential for a real estate bust in the near term seems very reasonable.
On the other hand, the real question, not only for investors, but also for the economy as a whole, is what happens if and when current economic conditions change. What we know is that leverage works both ways -- it provides the potential for huge gains as well as the possibility of huge losses. Just ask anyone who was buying dot-com stocks on margin about five years ago.
Results for the Index of Investor Optimism poll are based on telephone interviews with 804 investors, aged 18 and older, conducted June 1-19, 2005. For results based on the total sample of investors, one can say with 95% confidence that the maximum margin of sampling error is ±4 percentage points. In addition to sampling error, question wording and practical difficulties in conducting surveys can introduce error or bias into the findings of public opinion polls.