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The primary feature of the real estate market is that the prices change so slowly that margin calls take years to happen. People are trading houses on 400%-2000

The primary feature of the real estate market is that the prices change so slowly that margin calls take years to happen. People are trading houses on 400%-2000% (4x-20x) leverage. Whereas with the stock market and other asset classes, you can't generally get that much leverage, and when you do the risk of getting margin called is perpetual and instant. So although housing prices don't necessarily increase faster than the S&P500, and that there are many local variables in play, the same 7% increase YoY can really be a 140% increase YoY, while you are also renting out the home for more cashflow. Liquidity of the housing market has vastly improved over the last 5 years, mostly due to new kinds of lenders and underwriters in the market, with the current year being even more liquid than ever. The downsides of real estate haven't gone away. Like maintenance and physical presence needed, which is difficult for an individual as the portfolio expands. The physical presence demand - or the need to make it economical for there to be someone else maintaining the property - means that it is difficult to come up with the downpayment for real estate in areas you would actually like to live in, but are fully capable of renting in. So the barriers of entry stay where they are.

toomuchtodo 6y ago
The margin call only occurs if you can't service the debt. As long as the note is paid, you can drag the debt out to note maturity (assuming fixed rate vs ARM, interest only, etc). If you have enough income from investments, and can service the note until maturity, whether you rent the property or not is immaterial. You can leave it vacant forever. Same if you pay it off and hold. For this discussion, I'm going to waive away the maintenance costs on a SFH, as they are immaterial for the size of the homes in SF regardless of what the value is determined to be by an arms length transaction.
- vmception 6y ago
  Yes, and this is true in both markets, real estate or stocks. In the stock market you have up to 5 days to service the debt, and may also get liquidated instantly if the broker feels threatened. In the real estate market you have months upon months and maybe years, before your property is taken away from you.
  - toomuchtodo 6y ago
    I agree that the mechanisms are somewhat similar, but also that they are wildly different (unlike a securities margin loan or pledged asset line, your lender can't foreclose if the value of the property declines and you can't meet a margin call; as long as you keep paying the note, the value of the property could plummet to zero and the lender must continue to accept payments and allow you to retain ownership of the parcel). Conversely, someone like Interactive Brokers is going to liquidate your holdings with extreme prejudice if the securities collateral declines below what their risk management feels comfortable with (other brokers are going to call you and perform a margin call). You also can get way more leverage with real estate loans versus margin loans or pledged asset lines.
    - vmception 6y ago
      It's good that they can't, but even in the stock market you can get perpetual gradual margin calls that you can continue to meet if you felt like it, as long as they were gradual and not steep then a good broker will not liquidate your position at the lows. I'm mainly responding to provide helpful context to others. Not for a typical pedantic thread where we are already agreeing with each other but just squabbling over semantics. I would say this is the primary savings grace for real estate investors and homeowners. They get to build equity in so many scenarios that it works out for them and lets them maintain access to low cost capital, against the equity they build up.

toomuchtodo 6y ago

The margin call only occurs if you can't service the debt. As long as the note is paid, you can drag the debt out to note maturity (assuming fixed rate vs ARM, interest only, etc). If you have enough income from investments, and can service the note until maturity, whether you rent the property or not is immaterial. You can leave it vacant forever. Same if you pay it off and hold. For this discussion, I'm going to waive away the maintenance costs on a SFH, as they are immaterial for the size of the homes in SF regardless of what the value is determined to be by an arms length transaction.

vmception 6y ago
Yes, and this is true in both markets, real estate or stocks. In the stock market you have up to 5 days to service the debt, and may also get liquidated instantly if the broker feels threatened. In the real estate market you have months upon months and maybe years, before your property is taken away from you.
- toomuchtodo 6y ago
  I agree that the mechanisms are somewhat similar, but also that they are wildly different (unlike a securities margin loan or pledged asset line, your lender can't foreclose if the value of the property declines and you can't meet a margin call; as long as you keep paying the note, the value of the property could plummet to zero and the lender must continue to accept payments and allow you to retain ownership of the parcel). Conversely, someone like Interactive Brokers is going to liquidate your holdings with extreme prejudice if the securities collateral declines below what their risk management feels comfortable with (other brokers are going to call you and perform a margin call). You also can get way more leverage with real estate loans versus margin loans or pledged asset lines.
  - vmception 6y ago
    It's good that they can't, but even in the stock market you can get perpetual gradual margin calls that you can continue to meet if you felt like it, as long as they were gradual and not steep then a good broker will not liquidate your position at the lows. I'm mainly responding to provide helpful context to others. Not for a typical pedantic thread where we are already agreeing with each other but just squabbling over semantics. I would say this is the primary savings grace for real estate investors and homeowners. They get to build equity in so many scenarios that it works out for them and lets them maintain access to low cost capital, against the equity they build up.