Contrarian play on real estate

[sweeps]

When is the time to make a contrarian play on real estate?

Home price declines steepen in fourth quarter - Realtors

[Broken Arrow]

Interesting question! My tea leaves seem to be getting quite a bit of action as of late.

I think it's fairly obvious that REITs are an easy bet right before a housing rebound. The question is when is this subprime mess going to be sorted out.... Personally, I've been a bit surprised that it's taken this long and we're still mired in it... which suggests to me that the situation is far worse than even many experts have suspected.

But even then, we still have to wait for consumer confidence, and-- more importantly-- consumer means to catch up to the large inventory of existing houses that are already built....

Ah, but the play needs to be made before any of that happens (but ideally towards the end of the stagnation).... So, without knowing exactly when to time the market, I think now is as good as any to make a play for it. Just don't expect it to bear fruit anytime soon (like, within the next 5 years).

With this year's portfolio, I've rebalanced 10% into my bond fund, which I think should perform quite well. Next year, and depending the market climate then, I may shift that portion over to REIT.... Neither my portfolio nor my risk tolerance requires that I have both yet....

[Scanner]

I think if you have room in your portfolio for re-balancing, buying a REIT now makes sense.

You generally as an investor have to buy on the way down. . .not try to time the bottom, because bull runs are usually quick. You just have to have nerves of steel. . .buying in a declinng market isn't very fun. So, you'll keep buying and buying declining shares each month.

And even when real estate rebounds. . .I bet you will only see modest returns 5-8% in the following years. It will 10-15 years IMO before we see what happened in the early part of this decade - a bubble expansion. Builders want to build, that's what they do. . .so that shake-out has to happen to.

Think long term on this one.

[flatrock]

Reit

I have been looking at this also. The Vanguard REIT index is down 20% from its high. I had considered finding out what its yield was in the last housing crash & comparing it to its present yield as kind of a yard stick to help in determining when to jump in. In my area new houses are selling for less than what it costs to build them which is kind of odd and not a good sign I think.

[humandraydel]

Personally, I don't think the time is now. Banks are increasing their lending standards and requiring down payments again. This will decrease the "demand" for houses as lots of people don't have the savings required to put a large down payment on expensive homes. Couple this with the fact that investors who buy securitized mortgages are going to want more of a risk premium - which means higher interest rates for everyone - and you have a recipe for continuing declines in the price of houses.

[aida2003]

I think if you have room in your portfolio for re-balancing, buying a REIT now makes sense.

You generally as an investor have to buy on the way down. . .not try to time the bottom, because bull runs are usually quick. You just have to have nerves of steel. . .buying in a declinng market isn't very fun. So, you'll keep buying and buying declining shares each month.

And even when real estate rebounds. . .I bet you will only see modest returns 5-8% in the following years. It will 10-15 years IMO before we see what happened in the early part of this decade - a bubble expansion. Builders want to build, that's what they do. . .so that shake-out has to happen to.

Think long term on this one.

That's what I've been doing this year so far...when to add a REIT idx fund to my RothIRA since we don't have any in our retirement investments yet. I know the rule "don't try to time the market", but I'm still hesitant to plunge $3K at once (new fund with Vanguard).
I keep waiting because I also hear/read that sub-prime's mess will get worse before it gets better. Ech...maybe after the 1st quarter release of banking industry results, I might decide something....I don't know.

[sweeps]

Housing in deepest decline since the Great Depression, economist says

[jc3900]

Yeah, I don't know if now is quite time to buy. However, you might want to start buying and get an average price over the next year or so. The thing that makes me a little anxious about starting this early is that the majority of the subprime loans are supposed to reset later this year and 2009.

[Slug]

I feel like it's early. Just reading this article and the following comments made me think twice then thrice.

[MonkeyMama]

Being in California and knowing a slew of people who aren't in trouble right now but can only afford their homes because of their ARMS AND their 2 incomes? I would wait it out a bit. At least for the wave of sub-prime ARM resets. This year is going to be a big year. Likewise, the increasing layoffs will be devastating for many.

Investing in other areas may be different. But I wouldn't touch real estate in some of the more expensive areas. Or REITs that invest in these areas.

[humandraydel]

Couple this with the fact that investors who buy securitized mortgages are going to want more of a risk premium - which means higher interest rates for everyone - and you have a recipe for continuing declines in the price of houses.

I find it interesting that despite the fact that the Fed has significantly cut rates recently, mortgage rates have gone up! All of this even though over $100 billion has recently been auctioned off at low rates. The banks are hoarding it for themselves and will continue to scale down risky lending. There's still a long way to go before this correction ends.

[jc3900]

Its called deleveraging. They are taking down losses right now and can't afford to lend out a lot of money right now. Why else would they be cashing out of visa. Just think about how many times in the last month, you have heard big banks and mortgage houses "raising more capital."