Last week, I had a couple come into my office, worried because their 401K was down by 20% this year. They had some investments in their 401K, and they also had some real estate they were renting, and they wanted to move their 401K to an IRA so they could buy more real estate. I told them that was doable—once you’re over fifty-nine and a half years old, you can switch a 401K to an IRA if you want to—but when I asked why they were looking to do it, they said it was because they’d had such good luck with their real estate investments.
People can be well-informed about certain topics and still be ignorant about related topics, or they can even be well-informed but intentionally ignore the data on some issues; that’s the situation this couple was in. They saw that they had lost money in their 401K, but they didn’t think they had lost anything on their rental properties. I posed an example to them: what would happen if you put your real estate on the market today? They told me that their real estate was worth about $800,000. Obviously, you can’t sell real estate overnight, so it would take some time to cash that investment, but they were convinced that they would eventually get the full $800,000 for the property.
What they were overlooking was that, even if someone were to pay them the full value for their real estate, which rarely happens, the real estate market isn’t static. If I had asked what their property was worth a year ago, the answer would have been closer to $950,000! But in a single year, the market value fell $150,000. These clients knew their 401K had lost some value, but they weren’t paying attention to how much value their real estate was losing.
There are pros and cons to all kinds of investments, and one kind of investment isn’t always better than another. Real estate is no exception. There are no markets of any type that only go in one direction: no market always goes up, and no market always goes down. Right here, in Austin, Texas, a local television station recently aired the report that housing prices are dropping here faster than in any other city in America. Austin used to be one of the hottest housing markets, and people believed that prices would never come down. But markets change fast, and according to realtor.com, Austin’s median home price dropped over 10% between June 1st and September 1st of this year. That rapid loss over three months is reflective of the market now; what about when the big recession everyone is worried about hits the markets?
The US economy is in a slight recession right now. Gross domestic product (GDP) fell slightly in the first half of the year. Now experts are predicting that GDP will only rise by 1% in the next quarter if it rises at all. Many corporate executives worry that the market will continue to fall, and a much bigger recession will hit the nation. David Solomon, CEO of the investment firm Goldman Sachs, predicted a significant recession to come. Jeff Bezos was asked in an interview if he agreed with Solomon’s statement, and he replied that “it’s time to batten down the hatches!”
We’ve lived in an unusual—and unsustainable—period of the stock market. The US stock market has averaged an almost unheard-of 14% return per year for the past twenty years. When 401Ks became popular in the early ‘80s, money poured into the stock market, and the economy boomed for twenty years. But when a chunk of the population started to retire and took their money out at the turn of the century, the market experienced a huge crash and was down for three years. Since then, the market has continued to rise; we haven’t had two consecutive years of recession since we recovered from the crash. Unfortunately, that isn’t a good sign. Markets can’t keep going up forever.
Looking back at the last time the stock market behaved like this, in the ‘80s, and the resulting crash, we can see a similar pattern happening now. The market has gathered up into a giant wave, and it’s soon going to crash down in a tsunami. It’s beginning now, with the S&P 500 index down over 20% so far this year, Nasdaq Composite down over 30%, and international markets falling, too.
The couple who came into my office wanting to invest in real estate didn’t realize what Jeff Bezos, corporate executives, and the housing market itself are all telling us: the market is on a downward trajectory, and it still has a long way to fall.
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