The Truth About Real Estate Prices

The layman’s theory of real estate goes something like this: The Pilgrims arrived. They started using land. More Europeans came. The demand for land was so high that Native Americans were pushed out to make room for the newly arriving settlers. More land can't be built, so demand and prices will always rise, making real estate a great investment. Unfortunately, the formula isn't quite that simple. Here we take a look at real estate prices, and the long-held theory that they will rise indefinitely.?

TUTORIAL: Exploring Real Estate Investments

Historical Real Estate Prices, Bubbles and Beyond
Prior to the well-publicized burst of the housing bubble and the resulting real estate crash that began in earnest in 2007, historical housing price data from the National Association of Realtors (NAR) seemed to support the theory of endlessly rising prices. The chart below tracks median home prices from 1968 to 2004 and shows an average yearly increase of 6.4%, without a single decline during the 36-year period.

Figure 1: Medium home prices from 1968 to 2004Source: National Association of Realtors

What the Data Doesn’t Show
Unfortunately for homeowners, 2004 was the last year of healthy growth numbers before the market flattened. By 2006, NAR data showed just a 1% increase. After that, the markets experienced an unprecedented decline. Nationally, prices fell in 2007. They fell again in 2008 and yet again in 2009. By mid-2010, housing prices had fallen back to 2004 levels in a stagnant market. What had for decades seemed like a one-way ticket to growing profits had fallen by more than 30% in just a few years, according to Standard and Poor’s data. (Why Housing Market Bubbles Pop provides additional insight into declining real estate prices.)

Even before the numbers began to go the wrong way, the sales price trends data provided an incomplete picture. The National Association of Home Builders reports that the average home size in America was 983 square feet in 1950, 1,500 square feet in 1970, and 2,349 square feet in 2004. This trend continued in the first half of the 2000s, after which it began to decline somewhat. (For more information on home sizes, take a look at McMansion: A Closer Look At The Big House Trend.)

With the size of homes getting bigger and inflation adding to the cost of building materials, it is only logical that home prices would rise. But what happens if inflation is factored out of the picture? The result is something completely unexpected. Even before the real estate crash of the late 2000s, home prices fell frequently and significantly. (When the housing market is down, selling your home becomes a daunting task. Learn the top recession home-selling tips in Closing A Real Estate Deal In A Down Market.)

In Fact, World War I, the Great Depression, World War II, the 1970s and the 1980s, all saw periods of significant price decline. Lesser declines have occurred on a regular basis at other points as well.?(To see a great illustration of this, check out this graph produced by the New York Times in 2006.)

National Numbers, Regional Trends and Your Neighborhood
Even the national trend numbers tell only part of the picture. Housing price trends can vary widely from geographic region to geographic region. A boom in California can mask a bust in Detroit. Even within the same city, numbers can vary widely. Areas that are experiencing new growth or gentrification can show significant price appreciation while areas across town can be in decline.

When looking at the national and regional statistics, be sure to account for the reality of the market in your local area. Rising prices at the national level may not help you if your city, state or neighborhood is in decline.

Reality
Another important point to consider when looking at real estate as an investment is that your “investment” won’t ever pay off unless you sell it. So even if your primary residence has doubled in value since you bought it, from a practical standpoint, it probably just means that your real estate taxes have gone up. All of the gain that you have experienced is merely a gain on paper until you sell the property.

If you chose to sell and hope to purchase another home in the same area, remember that the prices of other homes have risen too. To truly book a gain from your sale, you will likely need to move to smaller home in the same area or move out of the area and find a less expensive place to live.

While it is possible to tap the equity in your home by taking out a loan against it, using your house as an ATM has proved to be a foolish strategy in the past. Not only does the interest you pay eat into your profit, but the loan payment takes away from your financial stability. If real estate prices decline, you could find yourself in the unenviable position of owing more on the loan than the house is worth. (For more insight, see Home Equity Loans: The Costs.)

So, Is Real Estate a Bad Investment?
By now you may be thinking that there is no value in purchasing a home in the hope that it will gain in value over time. While it is true that you are unlikely to see any profits that you can spend if you plan to live in the same house all of your life, if you go into the purchase with an exit strategy, there is a much better chance of seeing a cash profit.

First, consider the reason you’re a buying a home. If the answer is “to live in it” then you should stop thinking about profits and losses. If the answer is “to make money” then you need to enter the transaction with an exit strategy. Keeping in mind the purchase price of the property, you should have a sell price in mind. When your price point is reached, you would sell the property just as you would a stock that has appreciated. This may not be a practical approach for your primary residence, depending on your lifestyle, but it is exactly what many real estate investors do when they purchase properties, renovate them and sell them. Just remember that prices don’t always move up. In 2010, some parts of the market were down 40% from their peaks. In the past, Japan has seen housing prices fall even more. That doesn't mean that those prices won't bounce back into profitable territory, but keep in mind that in some cases it could take a very long time.

The Bottom Line
With history as a guide, most would-be homeowners would do well to buy a place they actually hope to inhabit, pay off the mortgage quickly, live there until retirement, and then downsize and move to a less expensive home. It’s not a sure bet, but this strategy does increase the likelihood of making a profit.

by Lisa Smith (Contact Author | Biography)

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What You Need To Know About Financial Analysts

Have you ever wished that you had the time to research a security that you owned or wanted to buy? Conducting in-depth research on a company takes a substantial amount of time and there is a mountain?of information that must be sifted through in order to do it well. For busy investors, this is where analysts come in. These financial professionals provide investors with the basic information on particular securities, giving them the tools they need to gauge the attractiveness of certain investments.

TUTORIAL: Financial Ratios

The increased popularity of analyst ratings over many years has expanded their influence over the price of securities. The slightest change in an analyst's rating for a particular stock can make the stock take off - or send it into a tailspin. Some people believe that analysts have too much power; others point to the conflicts of interest today's analysts face. Whatever the reason, it's important that all investors understand the different categories of analysts and what drives each analyst's recommendations.

Types of Analysts?
Buy-Side
Buy-side analysts work for large institutional investment firms such as mutual funds, hedge funds or insurance companies. They offer recommendations on securities found in the accounts of their employers. These analysts focus their research on specific sectors or securities that are of interest to the investment firm. These reports are mainly for internal use.

Sell-Side
Generally employed by broker-dealers and investment banks, sell-side analysts are a part of the retail investment division. Their recommendations and ratings are created to sell an investment and are typically offered free of charge to the clients of the brokerage firm. The reports issued by sell-side analysts are generally more detailed and focused than those of the buy-side analysts. (If you're looking for a career in this field, find out more in Becoming A Financial Analystand Sizing Up A Career As A Ratings Analyst.)

Independent
These analysts are not employed or associated with any specific brokerage firms or fund companies. Independent analysts aim to provide unbiased and objective ratings. Independent analysts receive compensation either from the companies they research, which is called fee-based research, or by selling subscription-based reports. (For more on this topic, see Fee-Based Research: The Good, The Bad And The Ugly.)

Conflicts of Interest
Investment Banking Relations
This is one of the most significant areas of conflict of interest for analysts. Investment banks are financial institutions that perform services such as underwriting (issuing stocks and bonds); they also act as an intermediary between the issuers of securities and the investing public. In essence, when a company decides to go public, it will obtain the services of an investment bank to help facilitate the process and sell the new securities to investors. Consequently, an analyst may face a conflict of interest for the following reasons:

If the analyst of a particular security works for the same investment bank that is underwriting the new issue, he/she may be inclined to give a positive recommendation to ensure that the offering is successful. This is not unlike the way a car dealership might operate: all cars have advantages and disadvantages, but most car dealers will tell you that their brand makes the finest cars.
Investment banks are like most other businesses. They are always trying to increase profits, and they can attract more business by issuing favorable reports about their clientele. Favorable reports keep existing client companies happy and facilitate repeat business. This can give prospective companies the impression that they will benefit from the same favorable reports should they pay for the services of a particular investment bank. Brokerage Commissions
Brokers typically generate revenues from the commissions associated with buy and sell transactions made by account holders. Although these brokerages don't charge for the research reports that they provide, they are still profit-oriented organizations. The intent of their research is to create customer interest in a particular stock, which ultimately leads to more transactions.

Analyst Compensation
When analyst compensation is associated with the performance that their ratings generate, another conflict of interest may arise. Compensation that is directly based on the number of new investment banking deals generated by the analyst's reports, or upon the profitability of the investment bank in general can put subtle (and perhaps, unintentional) pressure on the analyst to issue positive reports and recommendations.

Ownership
Through direct ownership or through a pooled stock purchase plan, analysts and employees of the investment bank may own the very stocks that they are recommending. Analysts may, therefore, be reluctant to issue poor reports or recommendations on a security that they own because it could affect their personal profits.

Despite the number of conflicts of interest that can affect an analyst's recommendations, we should note that the U.S. government?and the?Securities and Exchange Commission (SEC) have established regulations in order?to clamp down on the various conflicts facing analysts. (To learn more about these SEC regulations, see Reg AC: What Does It Mean To Investors?)

How Do I Determine Analyst Objectivity?
In most cases, you will find an analyst's conflicts of interest (if any) identified in the disclaimer found near the end of any analyst report. The disclaimer discloses the type of relationship that the research firm has with the company being analyzed and how compensation is paid to the analyst or research firm (should they be compensated at all). Be warned, however, that just reading the disclaimer won't make you able to fully discern the relationship between the analyst and the company on which it is reporting.?

Analysts?Aren't All Bad
The historical impression of analysts as the "whipping boys" of the financial industry is another one of those instances where a few unscrupulous people have ruined the reputations of the rest. Regardless of what recommendation an analyst provides on a stock, research reports are still loaded with company information such as highlights from the last year's results, ratio analysis, past growth trends and other pertinent information that would take an individual many, many?days to compile.

No matter what opinion you may have about analysts and their industry, we hope this article has left you with a rough idea of what analysts do. Next time you scour through a research report, you'll know a little more about how to judge the integrity of the research, as well as that of the analyst who conducted it.

If you are interested in learning more about this subject, check out the article The Changing Role Of Equity Research In Today's Market.

by Investopedia Staff (Contact Author | Biography)

Investopedia.com believes that individuals can excel at managing their financial affairs. As such, we strive to provide free educational content and tools to empower individual investors, including thousands of original and objective articles and tutorials on a wide variety of financial topics.

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Alcoa: It's All About China Now (AA, ACH, VALE, FCX, BHP)

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What You Need to Know About the New CARD Act

In August 2010, Congress passed a new CARD Act that aimed to fix the ‘anti-consumer’ irregularities that surrounded the gift card and pre-paid card industry. Prior to this law being passed, consumers felt cheated by Card issuers and always had to live with hidden fees, unwarranted charges and so on. Not anymore. The Credit Card Accountability, Responsibility and Disclosure ACT of 2009 makes provisions that allow consumers feel more comfortable about purchasing and using gift cards.

The main provisions of the CARD Act are:

1. No more expiration - Prior to the CARD Act, it wasn’t uncommon for gift card holders to find their unused cards useless after a few months because the card has ‘expired’. This always benefited the issuer as they ended up pocketing the monetary value of the card at the consumer’s expense. With the new laws however, even though the gift card itself can expire, the money used to buy or reload a gift card cannot expire and must be use-able for at least five years. During the five year period, the card issuers must either replace expired cards at no charge or refund any balance.

2. Resolution of Fees Charged - One of the biggest consumer complaints was the many fees companies charged card holders. There were many obvious and many hidden fees that often left consumers feeling manipulated. Following the CARD Act, a lot of these fees are now considered unlawful.

Take the recent introduction of the ‘Kardashian Kard’ for example. The prepaid card was created by reality TV show sisters – Kim, Khloe and Kourtney Kardashian last year and received a lot of criticism because of the numerous and ridiculous fees associated with owning them. First of all, to purchase the card and get it working cost about $60, $1 to check your balance, $1.50 to speak to a customer service rep and $2 to make an online payment. Even worse, it would cost you another $6 if you decide to ditch the card and cancel your account.

The new law now states that for one year, inactivity, dormancy and service fees cannot be imposed. The only exception to this provision is if the card has been inactive for a whole year after purchase/activation, and even then, fees cannot be charged more than once every month.

3. Disclosure – The new laws require full disclosure of all fees and contact information on the back of the cards. The gift card must clearly state all inactivity fees, service fees and expiration dates. It must also display a contact number and/or website of the issuer.

These are the main provisions of the new law and to be fair they do tackle a lot of the problems previously associated with the gift card and prepaid card industry. On the other hand, there are still some things card holders need to watch out for despite this CARD Act.

Not all gift cards are covered by the Act.? Paper gift certificates, electronic payment codes, phone cards and loyalty or promotional gift cards are not covered.While the CARD Act prohibits a lot of hidden fees on gift cards, it doesn’t stop issuers from placing certain fees on their cards. It’s important for gift card holders to keep a close eye on cards they are holding and make sure they are not being charged unnecessary fees. Purchase fees are the biggest talking points because usually people end up spending more than the face value of the card to buy it and (sometimes) set it up. A website like GiftCardRescue.com has created a platform for people to save up to 30% off the face value of the gift card when buying and also allows people to sell their unwanted gift cards.Some cards will not carry full disclosures. While the CARD Act kicked into effect August 2010, the provision allows for a grace period on full disclosure for cards produced before April 1. The grace period lasts until January 31st, 2011. The grace period was allowed to prevent card issuers from having to destroy up to 100 million cards that had been produced prior to the CARD Act.

Writer Bio: Kwame Kuadey is the CEO and Founder of GiftCardRescue.com, a site for selling unwanted gift cards for cash. Kwame is also editor of Gift Card Blogger, a blog about discounted gift card deals and more.

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