Friday, April 22, 2005

Real Estate Weekly: Real Estate Weekly -- April 22 - General News - Personal Finance

The 1031 tax free real estate exchange is getting big play. Several of the properties my wife and I recently sold at Myrtle Beach were purchased by those doing a tax free exchange. Those who have made big money in real estate are keeping it--real estate investors don't like to pay taxes. It appears that a number of folks who have owned rent houses and apartments for income are now converting to resort property so they can enjoy what they have made.

The key is to move from a hot market to a cool market. The big problem is the cool market is shopping malls and office buildings. Still there are opportunities. No need to pay capital gains taxes unnecessarily.

The stock market has been such a yo-yo for the past few days that it is a relief to talk about real estate. The trouble is that stocks, bonds and real estate are all linked at the hip. A GNMA bond is a reverse mortgage. The value of a fixed rate mortgage swings in the opposite direction of a bond. Obviously it is hard to sell real estate if the rate on a GNMA is high but it is easy to sell a GNMA if the rate is high.

The r-square correlation of real estate and value stocks is 73. The r-square correlation of real estate and US Treasuries is 24. The r-square correlation of value stocks to US Treasuries is 20. It is not news that if long interest rates go up that real estate and value stocks might struggle.

The current situation is that long-rates are not going up, real estate is soaring and value stocks are struggling. The only part of this sentence that does not fit is why are stocks not going up if real estate is going up and long rates are staying steady? Sustained low rates increase the relative profits from stocks and real estate.

Clearly the market has been afraid of rising rates for some time. The fear was present the first three quarters of 2004 and it