Real estate as an investment vs T bills

bond bubble much?

in a crisis, you can sell the Treasuries. In a crisis, the Manhattan real estate will be no bid, and you have to pay the maintenance and taxes with no tenant. Not the same at all.

The question is more about expectations. If 2.7% is the level at which one is comfortable tieing up your money, than how much can one reasonably expect real estate - I know not all real estate is the same - to grow. I get the sense that the willingness to accept such a low rate of return over a 10 year period says a lot about the prospects for growth in any invesment -stocks, real estate, etc. Real estate is also hit w/ other significant issues - large transaction costs, high carrying expenses that might increase as real estate taxes are sure to grow.

10 year treasuries yield 2.7%, stocks are yielding 2-3%, manhattan real estate is yielding 3-1/2-4%. all indicators are deflation ahead.

It's fairly acknowledged that the CPI understates inflation with geometric averages, hedonistic effect and subtitution principles. Hell if Lettuce went to $40 a head, BLS would first tell us the lettuce has improved, then weight it downward, then tell us we're going to eat more spinach and if that failed tell us lettuce doesn' count because it's not core inflation(food & energy).

That said, the Fed's stated goal is inflation of 2% per year which means real interest rates of zero or less than zero. I see now way that T-bills of which one must pay taxes at the Federal level on could ever hope to compete with real estate which has many tax advantages(tax deferred growth,write-offs etc).

If you have the correct time-frame and can don't need the liquidity(the two have very different liquidty profiles) then real estate if properly researched should be the better investment. Of course the term is so -loosely applied here, I have to assume you are properly researching real estate options and properties.

And yes, we definitely have over-investment in bonds. Corporations are raising money in the corporate market and then lending it to the government and government related entities. We're as over-leveraged as ever.

Expectations are clearly low. There is an obvious flight to safety going on in the treasury market. Most rental yields are above 3% in NYC, but earnings yields in the equity market are around 8%. People just do not know where this economy is going so they buy treasuries thinking they can't lose with treasuries. If things do not implode, and they want to invest their money somewhere else, they will likely have a large loss with their treasuries.

Overall I agree with your point. Historically real estate has shown much lower volatility than equities, and is closer to bond volatility, but there is that liquidity discount to worry about.

Most on these boards just say...when mortgage rates rise, you will get killed on your real estate. I disagree since I don't think that will happen in a vacuum. If rates rise, you will get killed on your treasuries too.

A few weeks ago I came across some historical return and volatility data on S&P's website. Yes it is historical, and I know many believe the bubble has yet to burst in NYC. I think it is interesting since I would have thought real estate volatility would have been much higher over the past decade, which included both a boom and a bust. The case for real estate being a highly volatile asset requiring abnormally high expected returns just doesn't show up in this data.

Annualized
Asset Returns Volatility

Housing 4.74% 4.14%
Bonds 6.33% 3.84%
Stocks -0.95% 16.13%
REITs 10.81% 25.09%

Data from January 2000 to December 2009

Mortgage rates may be expected to rise. If the government reduces its involvement the private sector would demand higher premiums to compensate for the risk. This is especially true for high LTV loans such as those being done by the FHA.

I know, and as soon as the FED stops buying MBS, mortgage rates will skyrocket.

Oh, wait they already stopped and rates went down. I forgot.

To be sure, any action the Fed takes with regards to supporting Treasuries should be expected to translate into lower mortgage rates.

flmaoz... such simpletons really.

maybe 5% of the 2004-2010, buyers have the wherewithal to qualify for the lower rates. The rest HELOCed themselves silly, lost their jobs and or are so far underwater, the 3.5% 30yr fixed is like an Evian advertisement in the middle of the sahara.

who many people are underwater in manhattan as we speak?

Manhattan residential real estate doesn't yield 4.75% right now. Coops yield 4% and condos yield under 3%. Sell sell sell.

Bonds don't yield 6.33% right now either. Same analysis?

Using a single decade to compare asset classes is pretty silly.

Using a single decade to compare asset classes is pretty silly

It's also silly to ignore fundamentals when investing in asset classes. Stocks were an obviously over bought asset class a decade ago. Why should we be surprised that they returned zero over ten years? Real Estate today is in the same situation. I'd rather buy Johnson & Johnson with a 3.6% yield or Verizon with a 6.3% yield today then be in bonds for 2.5% or real estate for 3%.

jordy.. .that's gonna leave a mark on jhochie's HP 19BII