Want to find the best places to invest? Look for areas others are avoiding.
I would rather invest in something that has been down for 10 years than one that has been booming for the past decade. Today, no sector has suffered more over the past five years than housing.
Residential and commercial real estate prices have plummeted as credit has tightened and the demand for new real estate has dried up. Things look absolutely bleak in the sector and nobody is suggesting that investors buy any stocks with exposure to the real estate market.
But I think avoiding the real estate altogether is a mistake. Here are my current thoughts on several ways investors can get exposure to the housing sector.
What more can be said about housing? The residential housing market is still depressed. Housing prices have been circling the drain for years. Investors haven’t returned to the housing market since the crash of the late 2000s. Homebuilders have ceased new construction since a glut of old inventory hangs over the market.
First, the bad news. Existing home sales have fallen to their lowest levels since 1995 with home resales dropping 27% over the past month. This is a clear result of the expiration of the homebuyer tax credits. Fear is running rampant amongst buyers and sellers. No one wants to buy a home out of fear that prices will deteriorate further. So, why bother investing in the housing market?
Now, the good news. There are a few signs that the housing market may be due for a bounce. The homebuyer tax credits may have expired, but mortgage rates are still near all time lows. Investors can purchase a home at a 4.4% interest rate. This is enticing to first-time homebuyers with good credit. Also, property values have stopped declining in some markets and foreclosures are slowing down. These trends may signal that the housing market is bottoming out.
Are they a good investment? Yes and no.
I wouldn’t rush out and buy homebuilders’ stocks at their current levels because I think that investors will get a chance to buy them cheaper over the next few months. Companies like Pulte Homes (PHM) and Lennar Corporation (LEN) may be trading below book value, but they are likely to drop lower over the short term. I would, however, buy mortgage real estate investment trusts (REIT) right now. REITs are a great way of getting exposure to the real estate market without taking all of the current risk of investing in homebuilders.
Real Estate Investment Trusts (REIT)
Put simply, a REIT is like a mutual fund that holds real estate instead of stocks or bonds. With a REIT, you can invest in real estate without worrying about repairing buildings or servicing mortgages.
One of my favorite REITs is Annaly Capital (NLY).
Annaly Capital uses investor capital to purchase mortgage-backed bonds from quasi-government organizations like Fannie Mae. Annaly only investments in U.S. government backed debt. This places the risk of default extremely low. Annaly is attractive because of the company’s huge dividend yield. The stock is currently yielding 15.5%. Even if the company’s payout dropout over the next 12 to 18 months, the stock would move from an enormous yield to just incredibly high.
What do you think? Do you think it’s a good time to get long real estate?