Is The Real-Estate Rebound For Real?Posted: August 13, 2012 | |
By JOE LIGHT
For investors, “home” is no longer a four-letter word.
The real-estate sector, for the first time in years, is serving as a beacon of relative strength in an otherwise weak economy. Standard & Poor’s on Tuesday reported that home prices in its S&P/Case-Shiller 20-city index rose 0.9% in May from the prior month, after adjusting for seasonal trends, and have risen 2.6% since bottoming in January.
Some of the world’s smartest investors, including Warren Buffett, are taking notice, placing big bets on a continued recovery in the housing market. Other kinds of real-estate investments—including real-estate investment trusts that own shopping malls, apartment buildings and hospitals—also have been among the best performers this year.
For ordinary investors, the rebound serves as an opportunity to rethink how much of their portfolio should be in real-estate investments—and to participate in the rebirth of a sector they once left for dead.
“After the recent returns we’ve seen, people are naturally asking ‘Have I already missed it or is there further upside to come?’ From our perspective, yes, there’s further upside,” says Frank Haggerty, a portfolio manager at money manager Duff & Phelps Investment Management who comanages a $1.3 billion mutual fund that invests in commercial-real-estate companies.
There is reason for optimism. Not only are single-family home prices steadily climbing, but the Joint Center for Housing Studies at Harvard University in a June report said inventories of new, single-family homes in March were at the lowest level in 49 years. The upshot: It would take fewer than six months to sell the current inventory, the traditional boundary between a strong and weak market, says Eric Belsky, managing director of the center.
To be sure, some promising signals during the recession turned out to be false alarms. In mid-2009, the 20-city S&P/Case-Shiller Home Price Index began a yearlong rise, only to fall again. Yale professor Robert Shiller, who called both the early 2000s stock-market crash and the recent real-estate bust, says he isn’t certain prices have bottomed.
But even if the absolute nadir hasn’t been reached, most economists say the odds are good that real estate will be stronger over the next few years than it has been in the past few.
Meantime, experts say that because commercial real estate is such a big part of the economy, it should make up about 15% or more of the stock portion of an investment portfolio. Yet these days, commercial real estate comprises only about 3% of funds that track the broad stock market—meaning investors who follow the major indexes are drastically underexposed.
With that in mind, here is how to play the real estate turnaround smartly in three main ways—investing in home builders, buying real-estate investment trusts and buying and managing individual properties.