Wednesday, March 16, 2005

Will real estate pop like tech?


When I interview people for a story, I often ask them to describe turning points - the moment they decided to start a new business, for example. It's a way of getting to the heart of the tale.

The stock market also has turning points. The five-year anniversary of a big one just passed, with little notice.

On March 10, 2000, the Nasdaq stock market index reached a peak, at 5,049. That week, I interviewed financial planners who warned investors not to funnel all their money into tech stocks, which are heavily traded on the Nasdaq. But in the frenzy, many investors ignored those warnings.

One planner, Lauren Locker of Little Falls, reported in March 2000 that a client handed her a piece of paper with a simple message: "Tech, tech, tech, tech."

Then the sizzle turned to fizzle, and the Nasdaq headed south in a brutal descent. It still has not come close to recovering, recently clocking in a bit above 2,000.

You'd hate to think all this pain has been for nothing, but the question remains: Have we learned anything from the tech bubble's collapse?

The big lesson is not that tech stocks are evil, but that investors should avoid the temptation to pour all their money into whatever looks like the sure thing of the moment.

There's research suggesting that investors are much more sensible about their stock and bond investments than they were in the late 1990s. According to the Schwab Center for Investment Research, investors are now doing a better job of spreading their money among different types of stocks and bonds, just as advisers tell them to.

But many investors are doomed to learning the same lessons over and over.

Two North Jersey financial planners now say there's another bubble - in real estate.

"People are going crazy investing in real estate," said Karl Graf, a fee-only financial planner in Wayne. "A lot of people are chasing gains that just happened. Real estate has historically had big ups and downs, and sometimes the downs take 10 years to work themselves out, as they did in the 1990s.

"Condos are going up on spec for half a million in Asbury Park," Graf continued. "That's a big speculative risk you're taking there. Investors think they're going to make $100,000 on their Asbury Park condo by the time it gets built."

And Lauren Locker, a fee-only financial planner in Little Falls, said the hunger for real estate is not restricted to the Jersey Shore. She has elderly clients who are talking about buying investment properties in their neighborhoods, where prices have jumped over the past several years.

"They want to get out of their portfolios because stocks are no good, because they've fallen," Locker said. "They want to buy a second home and get rental income from it.

"They don't feel they can lose in this market," she said. Just as tech investors thought they couldn't lose in 1999. In fact, the feeling that an investment can't miss is often a signal that it's about to stumble.

By coincidence, I interviewed Graf and Locker the same day I spoke to a friend who is hot to borrow money so he can invest $800,000 in a beautifully renovated, four-bedroom apartment in Harlem. The apartments, according to my friend, are going fast.

When I told Graf about my friend's plan, he said skeptically, "I would be cautious about it."

"People say they learn, and some do," he said of speculative bubbles like the tech boom. "But most don't learn; they just move on to the next thing. People get swept up in their emotions - fear and greed. Fear is 'I'm missing out on something.' And you know what greed is."


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