I think Donald Trump knows a little about real estate. His magazine published this article in 2006.
IGNORING THE BABBLE ABOUT THE BUBBLE:
Real Estate is still one of the most solid investments you can make.
TRUMP magazine, Spring 2006
written by Gary W. Eldreed, Ph.D
"Attention media pundits, economists, and Wall Street analysts—history will again prove you wrong. Housing prices will not crash as you predict. Three reasons explain why.
THE LESSONS of HISTORY
As Santayana reminds us, those who do no know the past are condemned to repeat the same mistakes. Today we’re told that “home prices have peaked,” “houses are no longer a good investment,” “houses are unaffordable,” and “the real estate bubble is about to burst.” Put forth as wise musings, these calls of alarms say nothing new. The bubble babblers of today merely repeat the same off-the-mark predictions of yesteryear.
In the late 1940s, media commentators warned that “Houses cost too much for the mass market. At an average price of $8,000, two-thirds of all families are priced out of the market.” If you bought your home after the war, you paid too much. The days when you couldn’t lose on real estate are long gone, they claimed.
By 1960, the naysayer’s again fretted. By then the average home price had skyrocketed to $15,000—nearly double the price of a decade earlier. Surely prices are about to collapse, the media warned. By 1970, Business Week complained that at $28,000, “the typical new house is out of reach for most Americans.” The NEA told teachers, “Be suspicious of “common wisdom” that tells you to buy now because home prices are headed even higher.”
Flash forward another 10 years-when California and East Coast home prices jumped above $100,000. A bestselling book of 1980 was titled “The Coming Real Estate Crash.” Ten years later, (1989), with coastal prices now climbing above $200,000, Harvard economist Gregory Mankiw (later to chair Bush II’s Council of Economic Advisors) wrote a widely-publicized article that claimed home prices had peaked and would steadily fall 40% by 2005. Media commentators loved it. “Homes are no longer a good investment,” they gleefully chanted.
“Okay,” you say. “The pundits of the past erred egregiously. But this time it’s different. Our record low interest rates are going up and that spells doom for real estate.” This simply isn’t true. In 1969, lenders offered mortgage loans at 6 percent. In 1981, mortgage rates hit 16 percent. During those 12 years of jumping rates, home prices more than doubled. Toss that bubble theory into the dustbin of history.
THE QUEST FOR DIVERSIFICATION Since the 2000 bust in stock prices, financial planners have preached the gospel of asset allocation and diversification. In days past, diversification meant a portfolio of 20 common stocks. (Oops, another theory into the dustbin of history). Now, diversification refers to stocks (domestic and foreign), bonds, and real estate. Yet most Americans still dangerously overweigh stocks and under-allocate investment real estate in their portfolios.
As these investors gradually move their portfolios into more prudent allocations, demand for property will continue to grow. Naturally, increases in population, incomes, wealth, and economic growth will also push up property demand and prices. The trend line of the past 60 (actually 200) years will extend into the future.
INFLATION –PROTECTED INCOME Age wave boomers need inflation-protected retirement income. At present, the dividend yield on the S&P 500 equals 1.79%, and, the DJIA yields only 2.24%. Anyone betting on stocks for retirement had better plan to eat their nest egg. As to bonds, the 30-year Treasury is yielding 4.56%--and that income will not rise with inflation. Property? Even in high-priced areas of the country, unleveraged yields that will rise with inflation come in at 5% to 7%. Add leverage or invest outside of the coastal areas and you can achieve cash on cash, inflation-protected yields of 6% to 12%: skilled investors can do much better, but compared to stocks and bonds, even minimal cash returns from real estate look great.
For these reasons and more (see my book, Investing in Real Estate, 5th ed. Wiley 2006), I am buying. Come 2016, I’m sure the media pundits will once again complain, “Home prices have peaked. Homes are no longer a surefire investment. Just since 2006, prices have nearly doubled.” —Gary W. Eldreed, Ph.D