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Uh, yes it is. Volatility can be calculated if you have price data in the time domain.
You were only looking for 10% declines over 10 year periods. The volatility is greater than that subset of data
Tell you what, why don't you post a study that discusses how much more volatile real estate is over the equity market. I'm sure they exist if your data is correct
You were only looking for 10% declines over 10 year periods. The volatility is greater than that subset of data
Tell you what, why don't you post a study that discusses how much more volatile real estate is over the equity market. I'm sure they exist if your data is correct
That really depends on the type of rental property we are talking.
residential, vs plazas, vs office space, vs nnn investments, trusts, etc.. All have various volatility and cap rates to go with it.
ncole1... I hate to sound mean here, but your overall understanding needs significant work.
The judgment of an asset class's stability is irrespective of your leverage or your investment.
Yes, but the volatility of a composite portfolio depends on how much of it is allocated to what. If you have 50% stock and 50% short-term Treasury securities, the portfolio is much less volatile than 100% stock, if the stock allocation has the same composition in both cases.
Similarly, a "portfolio" composed of 100% real estate and 0% fixed income securities is less volatile than a "portfolio" composed of 400% real estate and -300% fixed income securities.
The asset class "real estate" has a volatility independent of leverage, just as stock does. However, the portfolio value does not.
Quote:
Originally Posted by celcius
You supply the leverage, not it.
Leverage simply means your portfolio value is less than some of its assets, since money is owed on the assets. Equivalently, there is a negative fixed income ("bond") allocation. A negative bond allocation is just as much a part of the portfolio as a positive bond allocation.
Quote:
Originally Posted by celcius
Diversification is your issue, not its.
So? As long as the discussion involves undiversified real estate, does it matter whose issue it is? Or just how volatile it is?
Quote:
Originally Posted by celcius
Cart before the horse. It is because real estate is stable... that such leverage is allowed and even encouraged.
Not really. The limits on leverage are set by the government, not the free market. Margin rules were tightened following the crash of 1929, and have stayed that way since. Mortgage rules were tightened following the crash of 2008, but now are getting loose to the point where people are buying houses with just 5% down. This amounts to 2,000% real estate and -1,900% fixed income. This is not due to the free market, but to the government being willing to guarantee those mortgages. If you got rid of Fannie and Freddie, someone without a 20% down payment could maybe get an 80% LTV mortgage, but the gap would probably have to be covered by high interest borrowing (~10% APR) or an equivalent increase on the interest rate of the first mortgage, due to the large risk to the lender.
The stability of the asset prices would be relevant in a free market, but we don't have a free market when the government sets margin requirements via the SEC and the government insures "private" mortgages.
Quote:
Originally Posted by celcius
A utility is a term describing industries that serve the most basic public living needs, like electricity, natural gas or water/sewage. Because utility companies generally exhibit non-cyclical income, they are widely considered stable. Real estate shares these characteristics.
Stable income isn't the same thing as stable asset prices, though.
Quote:
Originally Posted by celcius
??? It would appear here that you do not understand what a call option means. And I can hardly think of a topic more irrelevant here than morality.
A call option is an option to purchase the asset at a specified price, not an obligation to do so.
A mortgage is not a call option because it entails an obligation to pay. If you have a call option for a stock and the price plummets, you just let it expire. You can't do that with a mortgage, you must pay the amount, for the asset.
One may try to argue that they don't have to pay a mortgage on a property that has plummeted in value and thus it is like a call option. But this is where I invoke the moral argument: You promised to pay your debts and should hold to it, regardless of the value of the house.
Quote:
Originally Posted by celcius
Again ??? It wasn't meant to. The point is not mortgage vs. margin. The advantages of mortgages compliment real estate's economics. But such is not an argument against equity, and thus need not be rebutted by the merits of margin.
The point of invoking margin was to make an apples to apples comparison with mortgages.
Quote:
Originally Posted by celcius
No, and there's no use splitting hairs. (1.) Without leverage, real estate is a crappy investment. (2.) If you invest in real estate, you are smart to leverage. Take your pick -- the message is the same. And yes, I meant only in terms of capital appreciation. Cap rates are determined irrespective of leverage employed.
That's like saying a portfolio of mostly bonds is a crappy investment unless you replace the bonds with stocks, and if you invest in mutual funds, you are smart to eliminate your bonds.
If you ignore the rental "dividend" yield, it's apples to oranges unless you ignore dividends on stock.
Quote:
Originally Posted by celcius
There are forms of leverage other than debt...
If you're referring to call options, it's not the same as being in 200% stock. You get the upside but not the downside, and you can never end up with less than nothing.
Real estate isn't traded even remotely as often as stocks so you can't take a few price data points of transactions the last few decades and compare it with a stock that was traded a zillion times during the same period and conclude real estate is vastly less volatile!
when we evaluate a real estate investment we look at CURRENT RENT ROLE , current expenses AND A BIT OF BLUE SKY.
with equities book value means little. the market capitilization of that company is in part alot of future perception that if it materializes the price stays where it is . if it is different the price moves up or down.
the value can vary overnight by 20% if earnings are missed or based just on greed ,fear or perception. ever wake up and have a property worth 20% less the next day by normal market action? i would doubt it.
in effect you are paying alot of money in a speculation about the future, you can't see.
most real estate investing is akin to book value investing in the here and now and not market capitization investing which can be alot more speculative about what will be off in the future vs now. . that does not mean a developer can't speculate in real estate, of course they can but for most small investors we are buying a business which uses different yardsticks for valuation.
we just sold off commercial lease rights we owned with our partners. the price we sold them at was based on current rent values and a projected increase rate that was very realistic based on leases that already spelled out the deals.
if we were a public reit that price would have been all over the map with no basis in reality as investors perception of the future ,greed and fear took over and ran with the valuation ball. issues like will we even get paid all the money we agreed to since part of it is over 4 years will be baked into that public price , in effect any portion of our company that could be bet on would be bet on and reflected in our company share price.
i already went in to debt far beyond my wildest dreams to fund real estate deals but i would never buy a stock on margin.
Last edited by mathjak107; 10-10-2014 at 04:08 AM..
Why do virtually all discussions of mutual fund investing recommend less than 100% stock, yet when it comes to rental residential real estate, it is taboo to have a "mere" 100% of total value in real estate assets (i.e. paying cash for property)?
100% stock is less volatile, over long periods, than 400% real estate (and -300% mortgage notes).
whether 400% or 100% real estate it would be way to much unless you held enough cash for spending since real estate is not very liquid.
if you are getting rental income and can cover life you are good to go.
the same thing applys to 100% stock. it isn't to much if you can leave it for decades and many of us do.
you just need other money to live on.
the reason folks shy away from 400% equities is volatility. many can't take the volatility daily on even a 50/50 mix. real estate does not change by 26% over night like the drop we had in 1987 or a stock that missed earnings.
How is living in a house you own economically different (barring taxes) from renting a house from your neighbor which is identical to yours, and your neighbor renting from you simultaneously?
Tax-free income in the amount of the fair market rental rate. When you own a house & live in that house, you "pay yourself rent" and that rent is, of course, not reported on your IRS Form 1040.
From another thread. The analysis is easily extended to include more asset classes such as real estate.
Quote:
Originally Posted by SportyandMisty
About a month ago on CNBC there was a segment regarding ETFs vs. “hand picking individual stocks” where two guest luminaries debated their respective opposing positions. They also had recent $300K Jeopardy! winner Arthur Chu on the segment, and Chu said both of those approaches were far too risky for him. Chu said he invests almost exclusively in (relatively) safe bonds.
One of the guests then said “Arthur! You're so young! You're barely 30 years old! You should be in 100% equities!”
That doesn't seem right, I thought. 100% equities? Really?
The long-term annual return of equities (stocks) is much higher than the analogous long-term return of bonds. The traditional 60/40 portfolio splits the difference. See the following chart, which is 2nd nature to most investors, and is typically used to argue for the superiority of stocks over bonds. Indeed, in only a handful of 10-year timeframes does a 60/40 portfolio outperform a 100/0 portfolio:
In the above chart, the S&P 500 is used for equities, and the Ibbotson total return series for long-term corporate debt.
So, the obvious question is why bother to have any bonds in your portfolio if you are a long-term investor and can tolerate the risk?
Asness goes on to say perhaps the most important lesson of modern finance is that under reasonable assumptions the choices of (1) which risky assets to hold, and (2) how much risk to bear are independent choices. Under some simple assumptions, an investor chooses a portfolio of risky assets to maximize the portfolio's Sharpe ratio. Then, given the maximal Sharpe ratio of the portfolio P, the investor then chooses the proper mixture of P and riskless cash. This mix will vary from investor to investor because of differing tolerances for risk, but the relative weights among risky assets will stay constant. Feasible portfolios that maximize expected return for a given amount of risk are said to be "efficient."
The following table gives the data from 1926 through 1993 (remember, the paper I'm summarizing was published in 1996), restating the conclusion of the 1st chart posted:
Note that the comparison isn't really fair, as the 100% equities portfolio has substantially more variability (risk) in it than the 60/40 portfolio or the 0/100 portfolio.
Constructing a new portfolio makes the comparison more fair. Imagine an investor has already determined that (a) the 60/40 portfolio is the optimal portfolio of risky assets, and (b) the desired amount of risk is the same as a 100% stock portfolio. For a $1 investment, a NEW portfolio can be constructed by purchasing 20.0/12.9= $1.55 of the 60/40 portfolio, financing the extra 55 cents by borrowing.
The following charts restate the former, including this new "levered 60/40" portfolio:
Asness shows that for the exact same amount of risk as a 100% equity portfolio, one can instead have a levered 60/40 equity/bond portfolio that provides a higher compound annual return. Yes, a higher return for the same amount of risk. He uses his results to show that even very long term investors (e.g., 100-year investors such as university endowments) probably should not have 100% equities even in light of the historical superiority of equity returns relative to bond returns.
(He's financing the 55 cents of borrowing for each $1 invested by borrowing at whatever the then-current 1 month T-Bill rate is).
From 1926 through 1993, with the same initial investment of $1, the 100% equity portfolio grows to $800 while the levered 60/40 portfolio grows to $1291. Even though a 100% bond portfolio grows to only $40, using bonds in conjunction with stocks and leverage leads to an investment that grows to $1291. The investor who owns 100% stocks must bear the same risk and receive only $800.
Asness goes on to analyze scenarios with differing ways to look at risk (e.g., worst-case scenarios, etc) plus lots of other cases as well.
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