Close
Real Estate Investment News & Blog

Is Real Estate More Affordable Than Stocks and Movie Theater Tickets?

In spite of a tough job market, rising consumer goods prices, challenging mortgage loan underwriting guidelines, and numerous trillion dollar bailouts, home prices have been improving quite well across the nation.

What happens if and when mortgage loan underwriting guidelines ease up and become much more flexible for borrowers? What happens when more private, non-governmental entities begin to originate loans and/or purchase them in the secondary markets?

Let’s take a look….

Skyrocketing Prices & Affordability Indexes

I’m a bit confused. In today’s “Credit Crisis World” (www.thecreditcrisis.net), consumer goods prices  are skyrocketing and coupled with the “bust” and “boom” of both stock and real estate values.

Is the U.S. Dollar getting weaker, or is demand for consumer goods and assets (like stocks and real estate) increasing dramatically?

Why does gasoline continue to hover in the $4 to $5 per gallon price range when Americans are seemingly driving less each year due to the combination of increasing commuting and travel costs coupled with a stagnant job market?

As I have written before, a weakening U.S. Dollar is potentially the primary reason for the increase in oil and gasoline costs, since oil is traded by way of the “Petrodollar” system (or “oil for Dollars”).

The value of the U.S. Dollar and the price of oil are akin to a figurative “see saw” in that these values and prices tend to be inverse to one another. A weaker Dollar leads to higher oil prices, and a stronger Dollar leads to lower oil prices, historically.

$19 Movie Theater Tickets and $5 Popcorn

movie theater

Real estate is more “affordable”
than movie tickets.

I was shocked and appalled recently to find a Southern California movie theater in a large retail shopping center that offered $19 movie theater tickets for shows, even during the earlier daytime hours.

The cost of popcorn was somewhere in the $5+ range for a standard size of potentially stale and greasy popcorn.

How does a family of four or more afford to go out to the movies anymore? What happened to the old 75 cent movie theater ticket prices that I still remember when I was a young lad?

Am I the only one who has paid attention to how everyday prices have skyrocketed as it relates to items such as grocery store items, restaurants, entertainment complexes or theme parks ($90+ per person per day now for some of the more famous theme parks), bowling alleys, clothing stores, and book stores?

Back in the early 1990’s, $30 might have almost filled up a grocery cart at the local supermarket. Today, $30 will probably buy us a few items.

Skyrocketing Prices: A Comparison

Which category has increased the most in price gains in recent years – Stocks, Real Estate, or Consumer Goods (i.e., gasoline, food, entertainment costs, etc.)?

I believe that the answers are the Dow Jones composite stocks prices (#1), and consumers goods (#2). If true, then real estate (#3) is still lagging well behind both.

Gasoline

For example, the average price per gallon of gasoline in January 2005 was $1.78 per gallon. When compared with recent $5 per gallon prices in many parts of California in recent times, gasoline prices have jumped 281%+ between 2005 and 2013.  

If I divide 281% by eight (8) years (2005 to 2013), I arrive at 35%+ price inflation per year.

Dow Jones Composite Index

As it relates to Dow Jones composite index, stocks and the near financial implosion of the world’s entire financial system as even stated by Federal Reserve Chairman Ben Bernanke, the lowest Dow Jones closing in recent years occurred on March 9th, 2009 when the Dow Jones closed at 6547.05. Just four (4) years later, the Dow Jones rapidly increased to 15,000+ in spite of a stagnant and weak U.S. economy and job market.

If I divide 15,000 by 6,527, I will arrive at an approximate 229% price increase for the Dow Jones. After dividing 229% by four (4) years (2009 to 2013), I arrive at 57.25% price inflation per year.

Real Estate Lags Far Behind in Price Appreciation Percentages

corelogic house prices 0513

Corelogic Home Price Index Report

Since the last major housing peak near 2006 or 2007 (depending upon the U.S. region), median prices have fallen anywhere from 25% to 50%+ from their market peaks within the period of just a few years.

Thankfully, we have seen more positive news in regard to home price gains both regionally and nationally in recent years with 10%+ price gains over the past year alone.

Yet, how many home market regions have reached price levels back near their respective market peaks in 2006, 2007, or 2008? ANSWER: Very few.

If my home dropped 35% to 50% + in value from the market peaks near 2007, then I will need more than 6% to 10% appreciation gains per year for several years in order to even reach back near the once peak property values.

As analyzed over just the past five or six years alone, the vast majority of home prices nationally are still near ZERO PERCENT in terms of annual appreciated home price gains. If these numbers are true for many Americans, then does it seem logical that many home regions potentially can appreciate significantly in future years in order to partly offset the significant price declines?

What if 10%+ annual home price gains become more of the norm in future years as opposed to the more historical 3% annual home price gains?

Are Homes More Affordable Than Stocks and Movie Theater Tickets?

With the government and the Federal Reserve’s policies of flooding the financial markets with “easy money” by way of various bailouts and near record low interest rates, these seemingly infinite Quantitative Easing strategies (or “create money out of thin air in order to buy up more stocks, bonds, and real estate in order to allegedly drive these asset prices skyward”) should cause real estate prices to increase exponentially in both the near and long term.

As homeowners are more likely to “walk away” from upside down homes (where their mortgage debt exceeds their current property value), then improving equity positions for homeowners also helps banks or mortgage loan servicing companies, which back these same properties.

The bulk of many Americans’ net financial worth is derived from their real estate holdings much more so than any other asset class. Increased home equity gains lead, in turn, to happier Americans who are more likely to increase their consumer spending numbers as well.

According to data released by the Fiserv Case-Schiller index recently, the monthly payment on a conventional home mortgage for a median priced U.S. home now represents just 12% of median family income. This same “12% of median family income payment percentages” is the lowest figure since as far back as 1971, when these numbers were first tracked.

On a comparative basis, real estate seems much more “affordable” than a $19 movie theater ticket or a $100 tank of gas.

What Happens If Mortgage Loan Qualifying Eases Up?

To answer the question from the beginning of this article, if mortgage loan underwriting guidelines ease up and more private, non-governmental entities begin to originate loans, home prices may then rapidly increase. This certainly benefits more Americans as opposed to 35% per year gasoline price increases.

Historically, the best hedge against inflation is real estate. The combination of near record-low mortgage rates, pent-up buyer demand, and inflation can lead to solid real estate gains in both the near and long term. The increased equity gains in real estate should hopefully partly offset the insanely high $100+ fill ups at the gas pump or those $40 to $100 nights at the local movie theater. Your comments are welcome.

Loading subscribe form...

About the Author...

Check out Rick’s new book The Credit Crisis: 10 Years and Counting (August 2017 publishing date) as well as The Credit Crisis Deals: Finding America’s Best Real Estate Bargains.

Rick Tobin has a diversified background in both the Real Estate and Securities fields for the past 25+ years. He has held seven (7) different Real Estate and Securities brokerage licenses to date. He also writes college textbooks and real estate courses in several states for some of the largest educational firms nationwide.

Rick has an extensive background in the financing of residential and commercial properties around the U.S with debt, equity, and mezzanine money. His funding sources have included banks, life insurance companies, REITs (Real Estate Investment Trusts), Equity Funds, and foreign money sources.

You can visit Rick Tobin at RealLoans.com.

Comments

  1. Julius A. Borrus says:

    I,personally, believe that the DOW JONES averages is a false indicator of the economy. I cannot fathom that 30 out of over3,000 of the largest stocks or corporations are a true measure of what is really happening. When the average started it was less ,then 1500 stocks. I believe that the S&P 500 is a much better statistic and yes it to has gone up however not like the DJ and therefore gives a truer picture.
    As to the housing market,here in the North East it has regained most of what it has lost since 2008, certainly not all but most.

  2. Rick Tobin says:

    I agree with your thoughts and perceptions, Julius. Yes, how may just thirty (30) companies on the Dow Jones index best represent the state of the overall U.S. economy? The P / E Ratios are nonsensical for many of these companies, yet the stock values keep rising sharply partly due to QE policies.

  3. Bill Richards says:

    Having experienced the run up in real estate prices followed by the drop it is my opinion that a large part of the run up in prices was fueled by the extremely loose lending practices of the banks. When we were in the era of no documentation, no checking borrowers out, no need for even a social security number, no job verification and gimmick loans like the no-no interest only loan, it turned loose a torrent of scammers and others who just bid up property costs to a level that could never be sustained. When prices and loan payments get so high that people cannot afford them a crash inevitably results. New information I’ve seen said that 25 percent of the working population makes less than $10 per hour. Huge numbers are unemployed, on the government dole or employed only part time. If true, where are the people who are going to buy these higher priced properties as the prices run up? Not saying that there are no areas for prices to increase, but how soon will we reach another peak? How soon till the same or new gimmick loans return and start another round of this kind of inflation? Alas, peoples reactions to events are predictable. I believe that, as lending criteria are eased, people will repeat their actions which led to the last crash. What the latest crash has taught everybody is that, just like a game of musical chairs, you can make a bundle as long as you are not the last one holding the house.
    Every scammer who made money the last time will be back for more. Every person who tried to honor their obligations and then found out the scammers got away with it and the govt. bailed out the scammers with their money -making them feel like a fool, will take note. They will either not buy into the rising prices or they will join the party. After all, the scammers proved that there is little or no penalty when they cried that the evil banks were at fault for predatory lending and the govt., instead of arresting the scammers as well as the crooked bankers, took the honest taxpayers money and bailed the crooks out. Talk about laughing all the way to the bank! Those of us who honored our obligations are standing here looking like fools- our savings and wages stolen from us- while the crooks and scammers are living life big and laughing in our faces.

  4. Rick Tobin says:

    @ Bill: Your points and opinions seem very valid to me as well. How do many of the current stock and real estate values seem logical in spite of a stagnant economy? Our financial and governmental leaders seem focused on trying to drive asset values as high as possible so that we don’t end up like Japan back in the 1990s with massive asset deflation. When too much money is created though, then everyday items such as food, clothing, and entertainment costs increase quite a bit too.

  5. Jessica Sala says:

    The popcorn too!!!

  6. Mason Drake says:
  7. Rick Tobin says:

    @ Mason: I do also enjoy reading information from John Williams’ “Shadow Stats” website as well. His numbers seem more accurate than any numbers released by the government, especially as it relates to inflation numbers.

What do you think? We would love to hear your opinion.

*

Hide me
Let Us Help You Achieve Better Results. (IT's FREE!)
Name Email
Show me