Marketwatch – Why Housing Deserves a Home in Your Portfolio

By Amy Hoak, Marketwatch

CHICAGO (MarketWatch) — Now may be a great time to buy a house, given that years of falling home prices and low mortgage rates have made buying a place to live more affordable than it has been in decades.

And that’s not just a pitch from the National Association of Realtors.

A recent report from J.P. Morgan Asset Management, titled “Housing: A time to buy,” written by David Kelly and David Lebovitz, made the case for why a home may be a wise purchase.

Where to invest in real estate

Investors can find opportunities in apartment and shopping-mall REITs, according to Marty Cohen of real-estate fund manager Cohen & Steers, who advises caution around single-family housing, commercial and retirement properties. Jonathan Burton reports.

“Although the U.S. housing market remains extremely depressed, we believe that given current valuations and demographic dynamics, now may be the time to consider an investment in housing,” the report said.

Investors may be tempted to play off that theme, positioning themselves for the moment when home buyers come back in droves.

But that’s a trickier proposition than it sounds.

This housing market has been anything but predictable. And the pain inflicted during the housing recession has left deep scars, making it difficult for many people to pin their money to the belief that housing could soon be on the mend.

Plus, any recovery may be slow.

That’s because while prices are down and financing is attractive, it’s harder for people to qualify for mortgages. The high unemployment rate has dealt a blow to household formation, and other would-be buyers simply can’t muster the confidence to buy a home.

Moreover, many homeowners are underwater on their mortgage and won’t be able to sell their home, let alone buy a new one, anytime soon.

“My own read of the tea leaves is [a housing recovery is] going to take awhile, and there isn’t an obvious place to invest to play that theme,” said Craig Leupold, president of Green Street Advisors, a real-estate and real-estate investment trust research firm.

Home, sweet home

Any brave souls willing to make a bet on the return of the residential real-estate market right now might first look at home builders and the home-improvement stores as places to invest.

Builders have slashed volume in recent years, and are on track to sell 313,000 new homes this year — far fewer than in 2005, when 1.28 million new homes were sold.

In fact, builders have pulled so far back on creating inventory during the downturn, it’s possible the market could run out of existing inventory faster than expected once housing gets back on track, said Eric Landry, director of industrial sector research for investment research firm Morningstar Inc.

“When the confidence does arise, there’s not going to be enough supply to satiate it,” he said. After all, he noted, the population keeps growing and our housing stock isn’t growing with it.

Plus, he said, new buyers will want houses that are near job centers and are built for modern lifestyles, and some currently available houses won’t fit that bill.

Rooms with a view

If you think that housing sales will remain low, your best bet might be to snap up rentals at low prices.

Those with wherewithal and patience might invest in a low-priced property and turn it into a rental, which can be a lucrative move at a time when rents are on the rise because fewer people have the means — or the desire — to buy a home.

Some firms help the novice investor buy an income-producing single-family home and offer property-management support. These companies buy single-family home foreclosures, update them to new construction standards, find quality tenants, and sell the income-producing properties to investors.

“It’s geared toward your business owners and professionals who want to diversify their portfolio of investments and want to get benefits that come along with owning real estate,” said Eric Workman, vice president of sales for MACK Companies, which is based in the Chicago area. “Owning real estate without having someone else manage it for you becomes a full-time job,” he said.

Another, more liquid, option is to invest in apartment REITs. They’ll suffer if there’s a strong return to homeownership, but the sector should be solid for at least another 18 months, said Wells Fargo’s Hunt.

One big reason to look at apartments: Supply is at a 30-year low, and for every percentage point that the homeownership rate drops, another 1.1 million renters enter the market, Hunt said.

Plus, many 18- to 32-year-olds may still be wary of homeownership, since for the past several years all they’ve seen is home prices going down, Hunt added. And this is a generation that isn’t as secure as they’d like to be in their jobs, he said, so not being tied down to a mortgage will likely be important to them.

Amy Hoak is a MarketWatch reporter based in Chicago.


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