Which Is Better: Tulsa Real Estate Or Stock?

Around the country real estate results in many communities -- but not all -- have been extremely good in the past year. The National Association of Realtors says that median prices for existing homes reached $183,600 in May -- up 10.3 percent in the past 12 months.

However, from an investment perspective, home values have actually risen at a far greater pace. But for Tulsa, Jenks, Broken Arrow, Bixby homeowners the general average price increase is around 3% - 5%, but there will be variations.

Imagine that a home was bought in May 2003 for $166,455. Add 10.3 percent and sure enough the price a year later is $183,600.

But did anyone buy a home for cash in 2003? Some people, sure. But most homes, most of the time are financed. If you bought with 10 percent down ($16,546), your cash investment was up 104 percent.

What about those monthly Tulsa mortgage payments, taxes and insurance? They're just a form of economic "rent" -- vaguely what you would pay if you didn't own, what you might collect if you rented the property, and an "opportunity cost" you might lose if you bought for cash that could have been used in other ways to produce income.

According to "Charting Real Estate's Biggest Winners" (July 18, 2004), The New York Times asked James W. Hughes, dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers University, to compare stocks and real estate from 1980 through March of this year. To get his results, Dr. Hughes used data from the Dow Jones industrial average and the Office of Federal Housing Enterprise Oversight.

"In 1980, the Dow was at 830," Dr. Hughes said. "In 2004, it has been running between 10,000 and 10,500. Rounded off, that's about a 1,100 percent gain." Home prices in New York State over the same period, by comparison, increased 400 percent, according to the federal data.

"So, on the surface, it looks like you would have done better in the stock market," Dr. Hughes said. "However, that does not take into account the ability to leverage your initial housing investment."

In other words -- keeping the numbers simple -- assume you bought a $100,000 home in 1980. "By 2004, it would have increased to $400,000 in value," Dr. Hughes said. "Thus your gain would have been $300,000."

"However, assuming you only made a 10 percent down payment on the home -- or $10,000 -- that means your initial $10,000 investment grew to $310,000," he said. "That's a gain of about 3,000 percent, which is far better than the stock market. If you had invested the $10,000 in stocks, it would have grown to $110,000 in the same 24-year period."

"So that indicates the effect of leveraging your initial housing investment into a much larger value through borrowing."

There are, of course, other factors to consider in comparing housing leverage and capital gains. "Obviously, you have to pay the mortgage each month over the 24 years," Dr. Hughes said. "However, that is generally not appreciably different from what you would have paid in rent if you hadn't bought the home."

And so, finally, someone agrees with the idea that real estate returns should be valued on the basis of the cash actually invested and not just sale prices, that leverage counts, and that monthly ownership costs are simply a form of economic "rent."

Where I disagree with the good professor concerns the Dow Jones average.

To say that the Dow Jones industrial average rose from 830 in 1980 to 10,000 or so this year would be a far better compassion if we were looking at the same bundle of 30 stocks. However, that's not the case.

DJIndexes.com provides an excellent history of the oft-quoted average -- including company changes since 1980. For instance, during the period from 1980 through 2004 the Dow replaced a number of companies from the index including such well-known names as Johns Manville, General Foods, Owens Illinois, Inco, Westinghouse, Texaco, Bethlehem Steel, Woolworth, Goodyear, Union Carbide, Sears, AT&T, and International Paper Company.

What these changes suggest is that the difference between real estate and stock investments -- even when leverage and economic rent are included -- is still undervalued. Why? Because the bundle of stocks the Dow once represented has changed -- even though many former Dow components continue as functioning, solid businesses.

In other words, to have a fair comparison between the Dow Jones stock index and real estate, lets look at the stocks that were included in the 1980 version of the index. That the 1980 version of the index differs from the 2004 version is to be expected -- different companies are included each year. Alternatively, a house built in 1980 with three bedrooms and two baths on a given lot is substantially the same.

As to what real estate or stock will do in the future, no one knows. As they say on Wall Street, past performance does not guarantee future results. But then, they also say that on Main Street.

Greenspan: Housing Remains On Solid Ground ? Tulsa ?

Housing starts plunged 8.5 percent in June and mortgage interest rates have been at 6 percent or higher since late April, but there's still no place like the home market.

Further deflating real estate market bubble speculation -- at least in the short term -- Federal Reserve Chairman Alan Greenspan said July 20 in testimony before the Senate Banking, Housing, and Urban Affairs Committee that there are no indications of any abrupt or significant about-face in the housing market.

"In short, financial markets, along with households and businesses, seem to be reasonably well prepared to cope with a transition to a more neutral stance of monetary policy," Greenspan testified.

In a relatively rosy picture painted of a slowly growing economy, Greenspan said labor market improvements thus far and those expected in the near future would help offset slowed retail spending. Higher energy costs got the blame for consumers holding onto more of their home-related wealth.

"...Inflation also seems to have been boosted by transitory factors such as the surge in energy prices. Those higher prices, by eroding households' disposable income, have accounted for at least some of the observed softness in consumer spending of late, a softness which should prove short-lived," he said.

That's because record-low interest rates in recent years in Tulsa, Jenks, Broken Arrow, Bixby have allowed consumers to reduce their financial obligations by funding long-term debt with cheaper mortgage-based financing. Interest rates remain relatively low and continue to give consumers a home-buying edge. The appreciation that comes with home buying, in turn, should help boost consumer spending, Greenspan testified.

"Between mid-2002 and mid-2003, homeowners were able to refinance at lower interest rates almost half of total outstanding home mortgage debt...Although mortgage rates are up from recent lows, they remain quite attractive from a longer-run perspective and are providing solid support to home sales. Despite the softness of recent retail sales, the combination of higher current and anticipated future income, strengthened balance sheets, and still-low interest rates bodes well for consumer spending," Greenspan said. It was his first Monetary Policy and Economic Outlook Report to the Congress-related testimony since before June 30.

On June 20, federal monetary officials raised two benchmark interest rates -- the federal funds rate and the discount rate -- both 25 basis points.

The increase was the first time in four years the Federal Reserve's Federal Open Market Committee raised interest rates.

In anticipation of FOMC's move, fixed interest rates on 30-year conforming loans rose from the year's low of 5.38 percent in March to a high of 6.32 percent by June 17. By July 15 rates had fallen back to 6 percent, according to Freddie Mac's Weekly Mortgage Market Survey.

Greenspan also reiterated previous comments about how the favorable levels of fixed-rate mortgages would help prevent widespread household budget busting should interest rates continue to rise.

"Lastly, very large fractions of the total outstanding obligations of businesses and households are long-term, fixed-rate debt. As a result, rising market interest rates will not have much immediate direct effect on business and household debt service burdens," Greenspan testified.

The full report called the housing market "torrid" in the first half of 2004 with sales of both new and existing homes "exceptionally strong, and they hit record highs in May."

The report also pointed to strong economic foundation-building strength in Tulsa home price appreciation -- up nearly eight percent -- outstripping gains in incomes and rents in recent years. There's also an indication home-related wealth continues to improve the financial well-being of households as delinquencies on credit card and auto loans generally declined in the first three months of the year. Bankruptcy rates, while still high, stepped down in the first quarter from their recent peak.

In his testimony Greenspan offered only a few words of caution, including some for the housing sector.

"...Despite the lock-in of low interest rate costs on a substantial share of household and business liabilities, recent higher market interest rates will, in time, show through into increased charges against household and business income," he said.

In A Boom Market, What Does Properly Priced Mean?

In a market where demand is strong and it has become more difficult to figure out how much buyers are willing to spend, how do real estate agents determine the right asking price for a house?

It has never been an exact science. These days, agents often find themselves starting at a higher price than is borne out by the facts and go from there.

Supply and demand for Tulsa, Jenks, Broken Arrow, Bixby homes, of course, dictates the asking price. Obviously, if the greater Tulsa supply is low, the asking price will have to be adjusted upward to meet it. In general, though, the asking price is a balance obtained by considering a neighborhood and the sale prices of comparable houses within the context of market conditions.

Demand in some areas of the country is so strong that agents put up a number and someone pays it because the buyer fears that the asking price will be higher next week. Out-of-town investors often help to further inflate prices. Some current markets have shades of the late 1980s, when property appreciation and inflation made proper pricing beyond real estate agents' control.

In a normal market, agents should be able to take comparable sales and come up with something that looks almost like an appraisal, with all the pluses and minuses.

Now, many agents look at the comparables and the competition to see how the house stacks up against the others on the market. Then they will tell the seller that they'll look at the price again after two weeks of good marketing and re-evaluate it.

If there are no second showings or offers after two weeks, the asking price is probably too high.

How the property looks, its size and location are major factors in determining asking price. Sometimes, though, the house has features that are so special that agents adjust the asking price upward after looking at comparable sales over the last six months to a year.

Determining prices for new construction is totally different, because the seller is the builder, and the ones who are the most savvy about the market are the most successful.

First, the builder determines the Tulsa construction costs and keeps that number to the side. Then the builder checks out what the competition is doing. This means considering the features that the builder offers and the competition doesn't, the square footage and the builder's specifications.

Different Tulsa houses are priced based on type versus square footage and features. After coming up with a sale price, construction costs are factored in to make sure the builder is making the profit he expects.

Marketing a Tulsa model home is a snap compared with marketing an existing home, because the builder is in control of the situation.

With existing homes, the houses reflect the tastes of the sellers, which may not be what most buyers are interested in.

A seller's "taste" can be a plus or a minus. If a buyer wants hardwood floors and sees that the seller has replaced them with a less appropriate and too personal a choice, then there is a problem.

Curb appeal and amenities all contribute to pricing. Buyers shop in price increments based on what they think they should be getting. If the asking price is outside the increment, the house will sit. If a buyer knows that he will get a three-car garage in the $300,000 price range and sees a house at $275,000 with the three-car garage, he'll buy it.

HOME DID NOT SELL - WHY?