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What's the next Hot Market?

Posted by: Chris Palmeri on March 1, 2006

There’s no doubt real estate was the place to put your money in the past five years, much as tech stocks were in the late 90s. What asset class will shine in the balance of the decade? Large cap value stocks, says John Goode, manager of the $4.5 billion Smith Barney Fundamental Value Fund. Granted, Goode’s answer is self-serving—those are exactly the stocks his fund buys. But he does have a point. Large cap stocks have been out of favor the past five years. Goode’s fund has returned 2.9% per year on average. That’s a full 2% better than the S&P 500, according to Morningstar, but pales in comparison to the 20% or more some real estate investors have seen. Goode says he knew the housing market was overheated when his twenty-something children started asking him to look at homes with them. His son, Richard, and his buddies in the Air Force wanted to speculate on property in Las Vegas. “The seven homes we looked at had contracts in a day,” Goode says. “I told him I was going to give him a little red flag.” Contrast that with big media companies which, Goode notes, are trading at the lowest valuations in twenty years. “We do not think Google is going to destroy the business model of every media company,” he says. That’s why he’s been buying TimeWarner, Clear Channel, Disney and News Corp. Simularly, he’s been investing in beaten-up pharmaceutical stocks like Wyeth and Abbott Labs. Every dog has its day, and the big companies that used to be investment leaders will likely be again. Probably more so than your home over the next five years.

Reader Comments


March 2, 2006 8:54 AM

Yeah, 2.9% is not something to jump up and down about. A relatively small 5% appreciation in a rental house would yield the following in 5 years (assume $250k home): ($250k * 1.05^5 years) + $50k rental income ($900/mo., 1 month vacant each year) - $10k (routine maintenance) - $75k (est mort. pmt at 8%) + $10k (est tax benefits in cash, due to depreciation deduction) = positive cash flow at end of 5 years of $44,070 for real return on cash of 88% ($44,070/$50,000 down pmt). Annualized, that's going to be somewhere around 13.5% a year, compounded.

I'll take the rental house(s) any day...


March 2, 2006 6:27 PM

5% is historically a very high return for a house. Try 2-3% for a more historically accurate rate. That rate does have previous spikes built into it - over 20 years, it will probably be right again. That doesn't mean prices will fall, but they probably won't rise for a while at some point.

Basically, the finances of the US are waiting to pour into the next hot new thing - John Goode's point was that valuations of the market are pretty low and that it's fundamentally a good time to invest in large cap companies, unlike housing.

Anon E. Moose

March 3, 2006 3:19 PM

You'll take it IF you could find a house for sale at $250k that will rent for $900/mo. More realistically, at least in the 'bubble' markets (Most of CA, Phoenix, Vegas, Northeast Coast DC to Boston) to get your $900 rental you'll conservatively have to spend $400k. That raises your carrying costs by 60% (also increasing the mortgage deduction), and severely reduces your ROI because of the higher downpayment. I'd also not want to count on even 5% annual appreciation over anyhting les than 10 years after the run we've had.

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BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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