If you read the news accounts detailing the crash of the silver market, and listened to the chiling predictions by Wall Street pundits that "real estate is next," take heart.
The precipitous declines in the international precious metals markets in the past two months underscore the key differences of real estate from other investments, not the similarities.
Unlike the value of the gold you bought last year as an inflation hedge, or your silverwear, the market value of your home can't be driven up and down by small groups of investors trying to cover the market -- in the manner of the Hunts and their Saudi Arabian friends.
Nor can the value of your home be suddenly, sharply depressed -- like gold's decline from $800 an ounce in January to under $500 in April -- by the decisions of investors in New York, Zurich and the Middle East to take their profits and run, leaving small investors behind holding the losses.
Unlike the stock, commodities and bond markets -- all of which are highly sensitive to short-term investment perceptions by relatively small numbers of individuals and monitored daily in centralized exchanges -- the value of the home you live in isn't subject to such volatility or monitoring.
There is no "big board" for housing -- just 85 million households, living in dwellings spread across 30,000 jurisdictions, each of which has its own, highly localized set of factors that help determine the market value of residential real estate. What happens in New York or Washington can affect those values over an extended period of time, but no one individual can cause them to crash -- or inflate explosively -- as in other investment fields.
The problem with the "real estate is next" theory, propounded in varying forms by economists for Wall Street brokers and stock market-oriented publications for the past two years, is that it's based on essential misunderstandings of the U. S. real estate market.
For one thing, it ignores the historical performance of real estate in recessionary, money crunch periods: Housing values level off in a recession; they don't plummet like the stock market.
In the 1974-75 recession, deepest of several since World War II, real estate values flattened out in most parts of the United States, or rose slightly. The 1970-73 period had seen 7 to 9 percent annual increases in average resale prices of houses -- "inflationary fluff," in the words of Wall Street -- yet housing values didn't fall when the economy did.
They stabilized temporarily, and then began rising. They've done the same in every crunch since the early years of the Great Depression, and they're doing it in 1980.
Homeowners, unlike stock market investors, don't "cut their losses," sell off at give-away prices when times get tough or money is short. They simply don't sell. They postpone their plans, use their real estate for its intrinsic function -- its capacity to provide shelter -- and wait for the economy to recover.
Owners of silver ingots, stocks, bonds and commodities futures can extract no such intrinsic value from their holdings; their cash values are tightly tied to external factors.
The periodic flattening out of housing prices -- rather that declines -- perplexes Wall Street analysts because they see the financial world in terms of cyclical up and down market behavior.
What they miss is the uniqueness of the residential real estate market. It flattens out periodically to correct itself when prices get too far out of line with disposable family incomes, the cost of money, and the real costs of maintaining property.
The most recent corrective process for U. S. real estate began in the third quarter of 1979 and is likely to continue through most of 1980. For owners and buyers, it is fundamentally a healthy phenomenon because inflation was pushing housing out of everyone's reach.
But a correction is no crash . . . and a crash isn't likely.
Compare real estate's performance with the scenario written out for it in early 1979 by two bond market investment counselors, John W. English and Gray Cardiff, in a book called "The Coming Real Estate Crash." Widely publicized and excerpted in newspapers, English and Cardiff's book advised homeowners to sell their property immediately and put their money into the bond market, to take advantage of "historic" 8 percent high yields.
Readers who took that advice literally would be among the saddest investors today: They could have lost 20 to 25 percent of their capital in the bond market's price plunge since December. They wouldn't own a house, and probably would be forced to borrow money -- in a market with a 20 percent prime!