Nearly $600 billion of new money has poured into U.S. stock funds during the last four years. And as portfolios have swelled in value, housing specialists have seen more investors taking part of their windfalls to buy luxurious residences.
“Well-off families are starting to take some of their stock profits and moving to larger homes or adding on to their present homes,” says Portia Pantages, a broker-associate for the Coldwell Banker real estate chain. The Investment Company Institute, a trade group that watches mutual funds, has yet to see any statistical evidence of the trend, according to John Rea, the association’s chief economist.
Even so, Alan Weiss, who heads a company that tracks home valuations for investors owning $100 billion worth of mortgages, foresees that the stock market’s rise will “tend to have an upward, buoyant effect on housing over the next year to 18 months” unless interest rates ascend sharply.
Will housing values in most communities climb more than stock values in coming months? Of course, that’s hard to predict. Some Wall Street bears are now bracing for a drop, noting how many stocks are fully priced relative to their fundamentals. Yet bullish analysts predict that equities will continue to rise on a strong U.S. economy.
Compared to stocks, housing price trends are less volatile and are easier to predict, says Weiss, president of Case Shiller Weiss Inc., which forecasts future values for home markets across the nation. It can take 6 to 12 months for the direction of values to change in a residential community, compared with minutes or hours for stocks.
If you dip into your stock profits for a better home, can you expect to enjoy appreciation on the property? The answer depends on a complex web of variables specific to any particular community. Homes in an area with high job growth and little room for new construction could move up in value. But the contrary is true if employment levels in the area are stagnant, yet builders are adding to the local housing stock.
“You can’t generalize. It all depends on the supply and demand for each local market,” Weiss points out.
Even so, there are some strong demographic trends making it unlikely that most U.S. communities will enjoy rapidly rising prices during the next decade, as many did through the late 1980s, according to Kermit Baker of Harvard University’s Joint Center for Housing Studies.
The aging of the Baby Boom population means a slower pace of household formations, Baker points out.
But home-buying has never been driven solely by rational forces, says Gregory Nejmeh, who tracks housing stocks for the investment firm of Donaldson, Lufkin & Jenrette. Most people move to more luxurious homes for personal reasons rather than because they have made a conscious decision that housing is a better investment than such alternatives as stocks or bonds, Nejmeh says.
“Upgrading to a more expensive house can give you the quality-of-life benefits you or your family want,” says Leo Berard, charter president of the National Association of Exclusive Buyer Agents, who work solely for home buyers rather than home sellers.
He and other real estate specialists offer these pointers to people who are flush with cash from the stock market and are considering buying a more costly property with some of their profits:
1. Don’t focus primarily on tax considerations.
Granted, a home is one of the last great income tax shelters. Not only can most Americans still deduct most of their mortgage interest, but the new federal budget law also lets a married couple make a profit of up to $500,000 on a home ($250,000 for a single individual) and still be shielded from capital gains taxes when they sell.
Nevertheless, “taxes should be a secondary or tertiary consideration” when you buy a home, argues Berard, who heads his own independent real estate company. More important to most buyers is whether they are emotionally committed to a home purchase and believe it will improve their lifestyle.
2. Look to statistics for a sense of direction on a home market.
Since the recent past is predictive of the future for home values, it’s wise to look to your real estate agent for sale-price data on a neighborhood over the prior six to 12 months, Weiss says. If the direction is upward, it’s likely to be sustained–at least for a while. If the trend is downward, the same rule applies.
3. Watch out for a market that could spike.
While most housing markets are now appreciating slowly, some rare neighborhoods are experiencing rapid inflation. What sort of places? Most are areas where new technology firms are growing, where high-paid computer engineers and other technical specialists are in demand, but quality housing is scarce.
Unfortunately, two things can happen to burst the bubble in overheated markets like these, notes Ivy Schneider, who follows the home-building industry for Salomon Brothers. One is that the underlying job base can erode if the primary industry suffers a setback. The second is that new home-building activity can change the supply-demand ratio. Extremely sudden price increases can be followed by declines, as too many homeowners discovered in the early 1990s.
4. Decide if it’s wise for you to sell stocks to buy a better home. Some of the new well-to-do are strongly motivated by the quest for homes with open architecture, space for “his and her” home offices, entertainment rooms and high-tech kitchens, Berard says.
Those willing to cash in part of their stock profits to buy better housing are not always part of households with small children in search of more space. Some have grown offspring and seek to trade their suburban homes for luxury condos in culturally rich urban areas, says Pantages of Coldwell Banker.
She also sees a strong trend among affluent people in midlife to trade older homes for newer ones that require less maintenance, yet offer more amenities.
