Bailout Winners & Losers

What it all Means for Real Estate

Once the ink dries on the to-be-determined Washington bailout of Wall Street, everyone's focus will turn to sorting out the inevitable winners and losers. Although it's too early to say if all residential housing will benefit, it's predictable that at least one segment will: "medium-ish" upper bracket real estate.

Here's the logic: people who buy $250k homes typically don't have stock portfolio's. At the other extreme, people who buy $5 million homes probably also own lots of stock, so much so that even if their portfolio's get clipped in a bear market (like now), they're still financially immune.

However, you'd guess that people who buy $1M homes have at least some other wealth, probably in stocks. Their portfolio's have not exactly had a banner year, especially if they had exposure to companies like AIG, Lehman Bros., Merrill Lynch, etc.

Shift to RE?

Right now, at least some of those folks are probably thinking to themselves, "even after a 20% drop since the peak last Fall, stocks still look richer than residential real estate, which has been pretty beaten up by now. Even if real estate goes down another 10% from here, that's still better than watching one -- or several -- of my stocks blow up practically overnight. And I can't live in my stock portfolio . . ."

Why put it in your mattress when you can put it into your house?

P.S.: One more problem for the stock market relative to real estate: lousy returns the last decade coupled with off-the-charts volatility. To wit: $1 invested in the S&P 500 in 2000 is now worth . . . 80 cents. That same $1 put into Nasdaq stocks then is worth . . . 40 cents (more than 8 years later!).

Meanwhile, $1 put into real estate then peaked at $1.50 in 2006, and has since dropped to $1.30. Taking the sting off a bit: that 30% gain is tax-free.