..about real estate. I sat in stunned amazement as I watched Jim Cramer, host of CNBC’s Mad Money, as he flailed his arms, threw things and screeched about how real estate has plunged 50% to 60% and prices won’t bottom until June 30, 2009. In the same segment Mr. Cramer stated that he had already missed opportunities to buy real estate.
Claims of price drops in the general real estate market of 50% or more are way off base. Mr. Cramer cited the town of
Granted some housing markets did see dramatic price drop.
We see a similar pattern of borrowing, speculating, disregard for fundamentals and irrational investing in previous bubbles: the trolley car bubble of the 1890’s, the stock market crash of the 1920’s, the real estate bubble of the 1980’s, the tech stock bubble of the 1990’s and the commodities bubble over the past few years. All of these bubbles were driven by day traders and people who thought they could become a millionaire just by trading.
Mr. Cramer’s chicken-little hysterics and blanket statements of doom that do not reflect the actual reality is irresponsible and misleading. Real estate investing is not a day trade. Real estate investing has many factors to be considered such as the location of the property, market fundamentals and the appropriate capital and cash flow analysis to name just a few.
A comparison of real estate median home prices with some of the major investment indices would better gauge the performance of real estate as an investment. I choose 1/1/2008 as the “buy in” date and 12/31/2008 as the “sell” date, to compare how various investments have faired during this time period. I’ve eliminated items such as dividends, carry costs and other income or expenses to simplify the comparison. By doing so, we can compare the percentage gain or loss of each investment over 2008.
I choose to look at the performance of the three major stock averages: the Dow Jones Industrial average, the S&P 500 average, the Nasdaq composite and the national median home price (according to the National Association of Realtors).
In 2008, the Dow Jones Industrial average fell by 34%; the S&P 500 fell by 38%; the Nasdaq Composite fell by 41%; the median home price fell by 9%. Clearly real estate was the best performer of this comparison group.
The difference from price peak to trough over the past few years: the Dow Jones Industrial average fell by 39%; the S&P 500 fell by 53%; the Nasdaq Composite fell by 53%; the median home price fell by 18%.
Since peaking in 2007, national housing prices have fallen in value, but dropping 18% is not falling off a cliff, especially when compared to the drop in values of other major indicators. By comparison, real estate was a far better bet in this period than any of the other indices used in this model.
Compare January 2000 to January 2009: Real estate has appreciated by 11%: Dow Jones average was lower by 31%; the S&P 500 was lower by 38%; the Nasdaq Composite was lower by 62%. This last comparison shows that even after the recent dramatic price reduction of national housing median prices there was still a return earned if you had invested in real estate January 2000.
So with all this data, why on earth would Jim Cramer make such outrageous and false statements? Because theatrics, flailing about and screeching are great ways to build ratings and Mr. Cramer, after all, runs a TV show reliant upon rating.
My suggestion for anyone looking to make an investment into real estate, home improvements, commodities, stocks or anything else is to consult an expert, do a lot of research into the investment, understand the fundamentals of the investment and never listen to screeching TV pundits, because they are usually wrong. To me, right now there are opportunities of a life time to own real estate.