Tales of stock shock

Seth and Michelle Spangler are well equipped to weather the kind of clobbering stock market investors recently experienced. They can pay their bills and they're still in their 20s, young enough to assume the markets will recover.

But during the last rout on Wall Street, they hedged their bets by pulling all their money out of those investments and putting that cash into something they can enjoy: a house.

"Things are really unpredictable right now; we're not sure how things are going to turn out," Michelle Spangler said. "But [house] values were low enough that we could finally afford to buy."

With the financial markets in turmoil, some investors are taking their money out of the stock market -- or avoiding it altogether -- and are investing it in real estate.

For some, the move is pure speculation that the housing market has already hit bottom and that the stock market givebacks are still far from done. Others are finding that, with mortgage qualifications tight and down payment requirements high, cashing in their stocks is the only way they can afford to buy a house.

"The nervousness factor has gotten so extreme that some pretty calm people who have calm stomachs just can't handle it anymore," said David Goldenberg, a Minneapolis financial adviser who recently had a client -- against his advice -- cash in a retirement account to buy foreclosed properties.

"He's taking beaten-up stocks and is buying beaten-up houses," Goldenberg said.

Generally, Goldenberg isn't an advocate of such a practice because it locks in your losses in the stock market at a time when there's little evidence that the real estate market has bottomed out. On the other hand, he said, it might make sense for some who are looking to diversify their portfolio.

"It can't hurt to preserve and protect your wealth by having a few different irons in the fire," he said.

Danger: Falling prices

Just as stock market investors are counseled to stay the course through the ups and downs of the market, real estate investors need to have patience. Though home prices are down double digits and bargains abound, the days of property flipping are long gone. In fact, home prices are still falling dramatically.

"This is high-risk, high-reward," Goldenberg said.

Already, the median sale price of a house in the Twin Cities metro area has fallen nearly 30 percent in the past year, in large part because of steep declines in the value of foreclosures, which now represent more than half of all home sales.

Lois Marris, a sales agent for Edina Realty in Rochester, said she's fielding more calls from people who want to invest their money in foreclosures and other distressed sales that they can flip for a quick profit. She's cautious about that approach, however, because prices are still falling and the costs associated with buying and selling can quickly eat up potential profits.

"We don't have any certainty that we've hit bottom with home prices," she said. "We don't know that property prices aren't going to go down another 2 to 5 percent."

That doesn't mean she's against shifting money from securities to real estate. She and her husband, David, recently cashed in their entire 401(k) and used the proceeds to buy an option on a piece of land along Hwy. 52 between Rochester and Pine Island. While she doesn't think they scored a bargain, she's banking on the future. She says that there's going to be upward pressure on land prices because of just-announced plans to build a nearby bioscience research park that is expected to trigger more development -- and demand -- over the next decade.

Defying the experts

That decision didn't go over well with their investment adviser. The first time they executed a sell order, he talked them out of it. But as the market slid, they got more impatient and told him that if he didn't execute the sale, they'd find someone who would. By that time, they'd lost another 30 to 40 percent of their investment.

"Because they're the experts, we listened," Lois Marris said. "But because we're in real estate, we know about good opportunities."

Marris said that more than a year ago they started thinking about getting out of the stock market after watching two clients -- both seasoned and wealthy investors -- get out of the stock market several months earlier and invest that money in land. A third client cashed out his entire portfolio, sold his own home and reinvested that money in a larger house that cost him less. He's investing in other real estate, too.

"A lot of people are just sitting on the sidelines looking for opportunities, and some are truly moving into some very nice real estate investments," she said. "But these are long-term investments."

Hedge against inflation?

What's more common now, some say, is that investors are minimizing their investments in the financial markets and using that money for real estate instead. Steve Fiorella of ReMax Results, for example, has a client who has stopped putting money into his retirement account and is going to sell his house in Shakopee. He'll use that money to take advantage of low prices to buy a larger house that he can live in and enjoy.

"They're putting it [the cash] into the hard assets, thinking there's going to be inflation coming," said Ross Herman, who owns the local franchise of HomeVestors, the "We Buy Ugly Houses" people.

Those inflation fears are happening at a time when price declines on foreclosed properties are accelerating. That's happening in large part because the pool of qualified buyers is still relatively small compared with the inventory of homes for sale, and about half of all prospective buyers are only eligible for FHA financing, which can't be used for foreclosures.

Those limits mean less demand and lower prices. And that's why foreclosures are getting increasingly difficult for investors to ignore, said Kelly O'Neill, a Realtor who is also a real estate investor. She's working with a buyer who is trying to diversify his portfolio by investing less in stocks and more in real estate. And he's in a good position: He'll pay cash for those properties and will rent them out for a 10 to 15 percent return on his investment.

"You can't get that in the stock market," O'Neill said. "He's saying the opportunities are too good to pass up."

Jim Buchta • 612-673-7376