An Investment Sector We Should Continue to Avoid

Being involved with real estate in one way or another for over 20 years, you could call me a “real estate man.” I’ve seen boom and I’ve seen bust in the property market. Most importantly, I am an avid researcher of past real estate cycles dating back to the 1920s.

Plain and simple, housing prices rise when interest rates decline and housing prices decline when interest rates rise. After former Fed Chairman et al. reduced interest rates so aggressively in the early 2000s, housing prices in the U.S. surged to record levels. The housing market in the U.S., as has been so well advertised, peaked in 2005.

Interest rates started to move up in the mid-2000s and housing prices started coming down. In certain pockets of the U.S., home prices have hit bottom. In other areas, they have not fallen enough. How big the boom was, and where it was, determines the bust. For example, housing prices in Florida, Nevada and California have fallen very sharply, as supply outweighs demand. In New York, housing prices in the Big Apple are off only slightly — they have more room to go down.

As an investor, if you are looking to get into the housing market to make some money, I do not believe the time is right just yet. And I believe this for two key reasons:

— The stocks of the largest homebuilders as measured by the Dow Jones U.S. Construction Index have not turned solidly up in price. Many of these stocks have stopped going down and some have even shown some strength. But as stock market investors we want to buy when a stock has hit bottom and has shown clear signs of a price rebound. In essence, we want to buy on the way up.

— Housing price trends are long-term, not short-term. Yes, you can get into the property market today at the best prices in three years, but you will need to wait years before you see those prices rise again. Don’t expect to buy today and make a profit next year or even the year after. Until all the excesses of the U.S. housing boom are worked off, until all that supply of houses on the market is absorbed, which could take years, housing prices will not rise.