Will Real-Estate Values
Follow the Stock Market?
Question: I've been watching the stock market tumble for nearly a month. I was fortunate enough to sell my high-tech stocks on the way down and preserved a profit. Now I'm worrying about my real estate. I have two rental properties and have seen their prices nearly double in the last few years. Is this the top of the market for them, too? Should I unload them quickly to preserve my gains? Please help.
Answer: Don't let the stock market influence your real-estate decisions. One of the big reasons for the recent tumble in stocks (besides inflated stock valuations) was inflation worries. These were heightened by oil price increases over the last year, which will take many more months to work through our economic system, resulting in higher prices for many goods and services. In other words, we are likely to see higher inflation figures for many months to come.
The stock market hates inflation, real estate loves it. Real estate is widely seen as an inflation hedge. Hence, when inflationary pressures increase, investors tend to buy, not sell, property.
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Further, most areas of the country, particularly California where you're located, are experiencing a long-term housing shortage caused by the lack of new construction during the real-estate recession of the 1990s. Whenever demand is high and supply low, you expect to see rising, not falling prices.
The only cloud on the real-estate horizon is the possibility of higher interest rates, which the feds could impose to bring inflation down. Higher interest rates make it harder for more families to qualify to purchase homes.
However, with the stock market in turmoil, and with the Fed's recent history of small interest-rate increases, a big hike seems unlikely.
While no one has a crystal ball, paring stock holdings and keeping real-estate investments is probably a good scenario for now.
Mr. Irwin has more than 25 years' experience as a Los Angeles-area real-estate broker. He is the author of more than two dozen books about real estate and is recognized as one of the most knowledgeable writers in the real-estate field. Mr. Irwin's most recent book is "Buy Your First Home," (2000, Dearborn).
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Richard, Castro Valley, Calif.
Email your comments to rjeditor@dowjones.com.