Many readers have questioned The World of Money as to our feelings on the real estate market and the existence of a "Housing Bubble."  Real Estate prices are rising to be sure, however, can this trend continue?  Many point to the similarities of the go-go 80's.  The one quip that nearly every realtor can recite is that the three most important things in real estate are: location, location, location.  In the time when this 'rule' was coined, financing was a pretty bland area of consideration in the real estate field.  Generally a person would save 20% of the purchase price of the house, put that up as a down payment, and endure 30 years of equal payments.

The modern money markets have set this entire concept on its ear.  The three most important factors in real estate today are: terms, terms, and terms.  The availability of money for mortgages is unparalleled in history.  A person can easily finance 100% of the purchase price through 80/20 programs.  They can pay very low or no interest thereby allowing the principal owed to actually grow over time.  Theoretically this would be offset by perpetually rising values.  The multiple variation in terms allows a person to buy a million dollar house with $10,000 down and payments of $2500 a month.  There are now 40 year mortgages, variable rate mortgages, graduated mortgages, adjustable rate mortgages and every imaginable combination of these variations.

The net effect of all of this available money is more buyers chasing a slowly rising supply of houses.  The increase in the number of buyers has but one corollary - higher prices.  In previous volumes we have explored the role that Fannie Mae plays in this burgeoning  mortgage market.  Fannie Mae uses freshly created money to buy up the lions share of all mortgages.  In the process they have ballooned the money supply from $4.5 trillion in 1995 to nearly 10 trillion today.  By buying the larger majority of all issued mortgages in the primary market they leave very little in the way of a role for the traditional banker who loans his own money.

So what is a poor banker to do?

He loans money to the so-called sub prime market.  These sub prime borrowers were traditionally frozen out of the housing market.  They did not represent an additional demand on the market, in fact they were perpetual renters.  Now they are part of a growing pool of additional qualified buyers.  This is a trend that is here to stay.  All one needs is the desire to buy a house - and the funds are available.  Moreover, as long as the mortgage markets continue to provide cheap plentiful money, than this growth phenomenon can continue.  However, the specter of rising interest rates will all but dampen the rises expected by most speculators and homeowners alike.  If a protracted period of rising rates continues then a certain portion of home buyers will be priced out of the affordability index.  This reduction in demand will most likely cause prices to fall.

Another area of concern is in the regulatory issues.  For example, in 1986 Congress passed TEFRA (the Tax Equity and Financial Responsibly Act).  It changed the way an investor could depreciate an investment property by changing this period of deduction from 18 years to 30 years.  With this one regulatory change, Congress inadvertently sliced 30% off the value of investment properties nationwide.  Another twist is the mandatory 1099s issued at all modern real estate closings.  This document reports to the treasury department all proceeds from the sale of real estate.  Not that real estate provided any privacy in the first place, in fact it is one of the most visible of the tangible assets.  Any entity with standard business contacts can determine the level of your ownership interest in real property; attaching a lien or claim is as simple as a one form filing.  By changing tax laws and reporting requirements, Congress can adversely affect the value of investment real estate.

They can also provide a windfall.

I think, separate from the easy money previously mentioned, the change in tax law that allows a family to be exempt from taxation up to $500,000 in capital gains from the sale of a primary residence provided some sales impetus.  Before this change in tax laws, we had to roll our house into a larger house to avoid the capital gains.  In an effort to add to supply, which would dampen price increases, Congress provided this exemption.

The property tax scenario is quite an important factor in the affordability of houses.  Increases in local property tax can cause prices to react to the downside.  An additional factor offsetting demand is growth in the building fields.  As more buyers demand more houses, builders act to increase the available supply until equilibrium is reached.  These are the factors that have thus far contributed to the steady growth in real estate prices.  As long as these factors are acting against each other, you have the makings of a pretty decent market.  I own real estate and will continue to do so.

For me however, only one thing is better than real estate, and that is the numismatic market.  There, you don't have to worry about unnatural leverage forces creating buyers who don't belong.  In the rare coin arena: it is strictly cash and carry.  The only terms are "C.U.F.": cash up front.  No variable terms, leveraging, or financing available.

Furthermore, supplies are absolutely fixed.  The minted quantities of virtually all United States coins are a known quotient.  So there are no supply surprises and nothing which can be done to act as a negative affect on the current numismatic supply of any particular coin.  They certainly can't make any more.  Further, the number of coins appearing in public auction are also recorded and distributed.

On the demand side, the U.S. mint has done an incredible job of promoting coins as a meaningful asset.  They have stimulated demand in ways previously unimaginable.  As these actions translate into additional demand for rare coins, prices have to follow a rational course.  Fixed supply versus an increasing demand will most always result in higher prices.  When a person purchases a rare coin they remove it from the available supply.  It is one of the last bastions of capitalism and a pure supply/demand equation.

Remember that 1099 that follows the real estate transaction?  No such trouble in the numismatic field.  The purchase of rare coins is not a reportable event nor is the sale. 

As a tool for financial privacy, nothing beats coins.

As to the economic similarities, generally speaking, when real estate is rising so are coins.  The forces in play when the money supply increases will affect the value of both asset classes.  Real estate, however, offers far more risk in my view than any properly selected rare coin.  If interest starts to rise, real estate will soften and rare coins will shine.  Besides, rare coins are consistently one of the best investment vehicles.  They are a passive income generator.  They are not taxed until sale, and even then, only taxed as personal property.  They are completely private and not mandatorily reportable.

To top it all off, your coins will never call you from the safety deposit box in the middle of the night to tell you that the pipes are clogged.