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Investor Insights Blog|Stocks Fell in 2018: Is Real Estate an Option?

Real Estate

Stocks Fell in 2018: Is Real Estate an Option?

Compared to recent years, 2018 was not a good year for the stock market. The major United States indexes posted their “worst yearly performances since the financial crisis” on the last day of the year, according to CNBC.

The S&P 500 and Dow Jones Industrial Average were down 6.2 percent and 5.6 percent, respectively, for 2018. Both indexes logged in their biggest annual losses since 2008, when they plunged 38.5 percent and 33.8 percent, respectively. The Nasdaq Composite lost 3.9 percent in 2018, its worst year in a decade, when it dropped 40 percent.

The S&P 500 and Dow fell for the first time in three years, while the Nasdaq snapped a six-year winning streak. 2018 was a year fraught with volatility, characterized by record highs and sharp reversals. This year also marks the first time ever the S&P 500 posts a decline after rising in the first three quarters.

Even if stocks began to rebound in 2019, some in the financial industry say upward mobility wouldn’t last. Former Federal Reserve Chairman Alan Greenspan recently warned on CNN to prepare for the worst.

The former Federal Reserve chairman who famously warned more than two decades ago about “irrational exuberance” in the stock market doesn’t see equity prices going any higher than they are now.

“It would be very surprising to see it sort of stabilize here, and then take off,” Greenspan said in an interview with CNN anchor Julia Chatterley.

At the end of that run, run for cover.

Alan Greenspan

He added that markets could still go up further — but warned investors that the correction would be painful.

What options do nervous investors have if they want to attempt to protect against potential losses? Real estate is a possible option for diversifying and mitigating risk.

If history is any guide, the housing market could be the unlikely safe haven in the next recession once again.

The U.S. housing market has weathered all the recessions since 1980, with the exception of the Great Recession of 2008, Jefferies pointed out in a recent note.

The FHFA U.S. house price index rose by an average of 7.4 percent in the year prior to a recession and prices rose an average of 2.7 percent from the start of a recession to the end, the note stated.

“Other than during the GFC (Great Financial Crisis), home prices have kept rising even during recessions, probably because rates fall, the vast majority of people retained jobs and household formation continues,” said Thomas J. Thornton, Jefferies’ head of U.S. equity product management, in the note to clients.

Financial professionals believe housing would fare better than it did in 2008 were there to be another recession.

The subprime mortgage crisis brought about the last recession in 2008, but the housing market has since roared back with better lending standards. Lower long-term interest rates also boosted housing demand.

Real estate and other alternative investments can be part of your retirement investing.

If you’re looking to diversify your portfolio or already have an interest in investments such as real estate, it’s possible to use the same vehicle that you use to invest in stocks and bonds.

IRAs, Roth IRAs and other accounts can hold a range of investments in addition to stocks, bonds and mutual funds. Possible investments in these self-directed accounts can include real estate, notes, private placements, and even cryptocurrency.

1

I plan to purchase a rental property with my IRA. Does the rental income have to go back into my IRA?

Yes, all income generated by an IRA-owned property must return to your IRA. This ensures that you retain the tax-deferred or tax-free status of the investment.

2

Can my IRA purchase real estate that I currently own?

No. This is considered a prohibited transaction (see IRC 4975). You may not purchase a property, or interest in a property, that’s currently owned by a disqualified person, which includes yourself.


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