Wall Street v. Real Estate: Which Is More Trustworthy?

Wall Street (in particular, the S&P 500) has clearly been on something of a tear lately. But as they say in the fine print in all those ads, past performance is no guarantee of future performance. While the same could be said about real estate, at least with real estate, what you see is what you get.

Currently, real estate has a pretty cruddy reputation as an investment class throughout the U.S. for the obvious reason that values have plummeted nearly everywhere. But, poke a little deeper and you’ll realize that the real estate asset bubble (and the ensuing crash) was engineered by the same group that caused the stock market crash – the Wall Street insiders who, in a greedy rush to sell more and more asset based securities, bought and repackaged loans of ever-more dubious quality. No wonder real estate asset prices got out of hand – as is now generally recognized, people were buying houses that never should have in the first place, and got loans that were guaranteed to explode down the road, in some cases only a few months after they were written. Did you ever hear the one about the Mariachi singer claiming a six figure income? No, not a joke: WaMu approved his loan – and took a photo of him in his Mariachi outfit to “document” his income.

Then, undoubtedly, the Mariachi’s loan was pooled together with others and resold, all with the help of the bond rating agencies that allowed Wall Street to pull the wool over the eyes of pension funds and other unfortunates who actually bought these pools of junk loans. The suckers never saw it coming: as the New York Times put it, “buyers relied on the opinions of credit ratings agencies . . . These turned out to be overly rosy, and investors suffered hundreds of billions in losses when the loans underlying these securities went bad.”

Lately, there have been a few efforts to take the ratings agencies to task, most recently by California Attorney General Jerry Brown, who is in the midst of a seven month investigation into whether ratings agencies “acted improperly during the credit boom by assigning super-safe, triple-A ratings to mortgage-backed securities that later turned out to be extremely risky and in some cases worthless.”

Did you get that – AAA ratings for something that turned out to be “worthless.” Someone please explain that one to me.

Where does that leave the average person who has learned to become distrustful of the once-seemingly infallible Wall Street system of investing? Real estate, of course. The good news is that the crash of real estate values have created a lot of great deals – and the backlash from the junk loans has tightened credit considerably, making a repeat of the last bubble unlikely for the foreseeable future. If you buy an investment-grade property right, you need not lie awake at night wondering if that “triple A” rated “investment” your broker sold you was actually a worthless piece of paper – because you have a performing physical asset that will be around for a long time, one you can touch, feel, and rent for a profit. And even when it’s gone, you still have the land. That’s more than you can say for much of what’s been sold to investors on Wall Street the past few years.

Photo: azureon2

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.