The Housing Market: How to Play the Real Estate Rebound…
The Housing Market: How to Play the Real Estate Rebound…
by Louis Basenese, Advisory Panelist, Investment U
Associate Investment Director, The Oxford Club
Thursday, July 17, 2008: Issue # 822
The housing market black hole keeps getting deeper. In the past year, housing starts are down 32.1%. Building permits are down 36.3%. And foreclosures are up 48%.
Even worse, the dastardly mix of tighter lending standards and an increasingly cautious consumer has led to a supply glut. Inventories sit at 4.55 million homes, representing an 11.2-month supply.
So much for the long-believed notion that “real estate always goes up.” The industry giants are feeling the pain, too, right where it hurts the worst - in the wallet…
Collectively, the five largest homebuilders lost $3.4 billion in the latest quarter. No wonder home-builder sentiment is at a 22-year low, according to the latest National Association of Home Builders survey.
As The Philadelphia Housing Market Sector Peaks…
It’s hard to believe that just three years ago, on July 28, the Philadelphia Housing Market Sector peaked. I remember this well because two days prior - in a stroke of pure, unrepeatable luck - we sold our first home for 88% more than we paid for it 14 months earlier.
I can assure you, however, that my wife and I weren’t part of the ill-fated horde that mistook the lucky timing for skill and became full-fledged speculators. Those folks got an expensive lesson in supply and demand dynamics.
But who knew that just days after our windfall gain, the easy lending-induced mania would finally roll over? And today - one subprime fiasco and a credit crunch later - the industry is still paying the price.
All the pain is making value investors salivate. They’re just waiting for a telltale sign that the housing market has finally bottomed.
But we’re not going to wait. Because:
- The clear-cut signal isn’t coming.
- Whether the housing market rebound starts tomorrow, next week, or two years from now, it doesn’t matter.
- We can position our portfolios to profit no matter what.
The California Housing Market May Recover First
The latest 127-page Anderson Forecast out of the University of California indicates the leading edge - the California housing market - may be showing the first signs of a recovery.
“The combination of steep price declines, lower interest rates and an easing of the credit crunch may now be bringing bargain-hunter buyers back into the market,” said Ryan Ratcliff, an Anderson Forecast economist.
The lagging edge - the Manhattan housing market - might finally be showing signs of cracking. The Big Apple is now littered with price reductions in the middle market (apartments below $1 million), according to a report by Barron’s.
So is it time to act on this data and speculate on the coming real estate rebound?
Not so fast. Because fighting in the other corner, we have the University of Wisconsin and the Federal Reserve, whose recent analysis of the real estate market paints a murkier picture.
Their study suggests that the housing market bust may only be half over. The study’s conclusions are based on very strong data, too - historical rent/price yields, the typical pace of rental growth and the S&P/Case-Shiller Home Price index.
My point is that making an airtight case for either side is nearly impossible. Conflicting outlooks are regrettably the norm, not the exception. Just ask CNBC’s Maria Bartiromo, who got the lowdown (if you want to call it that) on real estate right from the horse’s mouth.
In an interview in March 2007 with the CEOs of homebuilders Toll Brothers and D.R. Horton, Robert Toll said, “It’ll be another four or five months before you finally burn off inventory in most of the markets.” Guess again!
D.R. Horton’s president and CEO Don Tomnitz, had a different outlook, saying “I don’t want to be too sophisticated here, but 2007 is going to suck, all 12 months of the calendar year.” Ding, ding, ding, we have a winner!
A Housing Market Turnaround Signal in 2008?
I hate to break the news to you, but no single data point or insider perspective is going to fortuitously signal an unambiguous bottom in the current housing market. Not new home sales… not building permits… not the latest inventory data… nothing. And nobody’s going to give us the “all clear,” either.
Waiting for irrefutable proof of the turn is flawed anyway. The stock market is a forward-looking beast. When housing prices “officially” bottom, real estate stocks will likely have already run-up in price. But there’s a surefire way not to get caught watching the paint dry…
Stick to the tried and true. Buy sound companies and have the discipline to stick to proven asset allocation. It makes all of the market indicators and posturing above pointless.
But that also means committing to owning shares of companies that are out of favor with the investing public. And no sector has been more discarded than real estate.
How to Invest in The Housing Market
I suggest a low-risk, low-hassle, low-cost approach to investing in the housing market. Leave active management behind and consider the Vanguard REIT Index (VGSIX). It will give you the broadest real estate exposure possible for an almost negligible expense ratio of 0.2%.
Public Storage and Equity Residential Properties are among its top five holdings. Both have returned over 12% this year. The fund also maintains consistent dividend strength, yielding more than 5% right now.
And here’s another little portfolio-boosting secret: This year’s big losers are often next year’s Wall Street darlings. Historical data bears that out. And so will holding a part of your portfolio in real estate.
Good investing,
Louis Basenese
To get more bang for your buck in real estate, Louis recommended three highly attractive REITs in the July 15 Communiqué - The Oxford Club’s twice monthly newsletter. If you’re not a member yet, here’s how to get access to the Oxford Club.
Today’s Investment U Crib Sheet
- As investors, one thing we need to do - but often forget - is to rebalance our portfolios.No one likes to swap a few shares of their portfolio’s high fliers for shares of the dogs. It goes against our nature. But research proves it’s the best move. After all, it’s the only surefire way to make sure we buy low and sell high.
- So instead of trying to guess where the real estate market is heading next, let’s just stick to a tried-and-true plan of attack. If we simply rebalance, we’ll be guaranteed to profit from the inevitable housing turnaround.Again, we’re not advocating you plow piles of money into real estate holdings. Or use leverage to make an aggressive bet with a small amount of cash. Instead, check your asset allocation. If you haven’t rebalanced lately, chances are you’re a little light on real estate. You’re probably heavy on oil, gas and small caps, too.
- So either trim back some positions, or put new money to work to bring your portfolio back in line with the targets. For more on rebalancing, go to Investment U Issue #812, The 4 Pillars of Investing: Don’t End Up as Stock Market Road Kill..
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