Is It Time to Invest in Real Estate

Published by peter | Filed under Market Trends, Real Estate

A must read from the NY Times: If the prime directive of investing is to “buy low, sell high,” it must be time to invest in real estate, right?Well, maybe. I think real estate bets fall into the category of things to do with money you can afford to lose. That’s why I don’t even mention real estate in my investing guide, which assumes you want stability in your investments to offset volatility in your business.With the economy this shaky, there are lots of hazards hanging over commercial real state, where vacancy rates are rising and rents are dropping. And although many people have long thought of residential property — especially their own homes — as sure winners, this market has delivered nothing but shocks for the last two years. One of the causes of the financial crisis was the nearly universal belief that home prices could not fall nationwide. Well, guess what?But with those warnings on record, how would you invest in real estate if you wanted to, either as a business venture or personal investment? Aside from buying individual properties, which can be awfully time-consuming for a small-business owner, there are several ways.The newest twist is a pair of exchange-traded funds that started trading June 30, offering a unique opportunity to bet on price changes of ordinary homes. The MacroShares exchange-traded funds track changes in the S.&P./Case-Shiller Composite-10 Home Price Index, reflecting home prices in the 10 largest U.S. cities. (The Shiller in the name is Yale economics professor Robert J. Shiller, author of the best seller “Irrational Exuberance.”)The index has become one of the most widely followed housing market gauges because it tracks price changes of the same homes over time, rather than looking at average sales prices in a region. Its latest data show prices fell 18 percent in the 12 months through the end of April.The MacroShares Major Metro Housing Up E.T.F. (UMM) is designed to rise in value when the index goes up, to fall when the index goes down. The MacroShares Major Metro Housing Down E.T.F. (DMM) does the opposite, rising when the index falls and falling when the index rises. The investor can therefore use the Down fund to bet the housing downturn will continue, and the Up fund to bet on a rebound. In fact, the E.T.F.’s use leverage to try to triple the gains on index moves. You could even use the Down fund to hedge against loss should your own home fall in value.These E.T.F.’s offer some obvious benefits over buying an investment property. You can essentially bet on the market nationwide, rather than a local market that may have quirks that make it run against the current. Plus, of course, you have no tenants to deal with and no unexpected repair bills, tax hikes or other headaches.Most important, your money remains accessible. Since E.T.F.’s are traded like stocks, you can sell your shares with the click of a mouse and write checks against the proceeds in a few days. That could be especially appealing if your personal assets are a reserve for your business. (Want to talk about your investing experiences as a small-business owner? Click here.)But these E.T.F.’s are very new, and it will take some time to determine whether they behave as intended. They do not actually own homes, instead putting investors’ money into Treasury securities and various cash holdings. Money is shifted from one fund to another to reflect changes in the index. Ideally, that means the Up fund will gain 10 percent as the Down fund loses 10 percent. But the funds’ prospectus warns this might not always be the case. If investors pile into one fund and flee the other, prices could be skewed by the imbalance in demand.