Is It Actually a Good Thing That a Home Is an Illiquid Asset?

June 30, 2016 No Comments »
Is It Actually a Good Thing That a Home Is an Illiquid Asset?

Here’s yet another post on the rent vs. buy argument, one that never seems to go away. I’ve written extensively on the pros and cons, but a recent conversation provided me with another interesting nugget.

I was speaking with a guy who happens to be a CFP (I think) and we were discussing investing and real estate and all that jazz.

At one point we got on the topic of emotional stock trading, a common scenario that arises when things like Brexit happen.

Stay the Course

Most CFPs and other financial advisors will generally tell you to stay the course in the event of a major dip or correction, instead of panicking and selling.

Why? Well it’s simple. You shouldn’t try to time the market because you could lose your shirt. And let’s face it, you don’t really know what’s going on with Priceline or Apple’s financials. You simply like their product.

Just consider this most recent event with Brexit. It looked as if stock market indices were going to tumble thousands of points for days on end, but then they completely reversed course in the past few trading sessions.

We’re now nearly back to where we were before Brexit, and some names are actually hitting new 52-week highs. So if you freaked out and sold, you might be kicking yourself for doing so.

Oops…if only it were more difficult to sell those shares.

You Can’t Unload Your Home Very Easily

Now consider if buying and selling homes was the same as buying and selling stock, the latter of which you can do in a matter of seconds from your smartphone.

Imagine if Brexit hit and you panicked and wanted to dump your condo. You agree to sell below what it was worth a week before and feel like you’ve made a smart move. Then a week later condo prices are commanding even higher prices than they were all year.

You kick yourself for reacting to the market and are now out a good investment.

This CFP basically said something to the effect of, “I wish stocks were as hard to buy and sell as homes so my clients wouldn’t be so reckless.” And it struck a chord with me.

Because homes are so difficult to buy and sell, and are essentially illiquid investments, homeowners often do pretty well with real estate because they remain long-term holds that ride out the good and bad.

Homeowners can’t be as speculative with their properties as they can be with stocks, which as mentioned, can be bought and sold with the push of a button.

In a sense, this means there’s actually a benefit to real estate being illiquid. It prevents you from being stupid. At least mostly.

This May Not Always Be the Case

This wasn’t the case during the previous housing boom because anyone could buy a home without proving they had the income, assets, and employment to satisfy the monthly payment.

That meant they couldn’t ride out the highs and lows – heck, they couldn’t make their first mortgage payment. We all know what happened.

Today, certain companies, so-called disruptors such as Opendoor, are trying to change the traditional home buying model and turn real estate into a practical daytrade.

It could eventually make real estate extremely speculative and dangerous, but such technology is still in its infancy and home buying and selling will probably always be a lot more complex and time-intensive than stock trading.

Anyway, the point here is that the illiquid nature of real estate can actually help protect you from the many short-term ups and downs all financial markets experience. And that’s probably a good thing for most people.

It seems the more opportunity we’re given to buy and sell, the greater the chance we have to make a bad decision.

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