Daily Gains Letter

How to Invest in the Housing “Bull” Market

By for Daily Gains Letter | Apr 18, 2013

















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Not everyone thinks the U.S. economy is still in trouble. In spite of high unemployment, a decrease in consumer confidence, a drop in U.S. retail sales, and a downward revision of the U.S. gross domestic product (GDP) growth to 1.7%, there are a number of well-heeled economists predicting nothing but good times on the horizon.

According to a recent Bloomberg survey, GDP is expected to climb at an annualized rate of three percent in the first quarter, versus the projected two-percent gain in March and the 1.6% gain that was forecasted for this quarter in December. (Source: Torres, C. and Saraiva, C. “Economy Bears Turn Bulls Seeing 3% U.S. GDP Few Saw in 2012,” Bloomberg, April 12, 2013.)

Wall Street’s well-intentioned bankers are in agreement. Morgan Stanley’s chief U.S. economist, Vincent Reinhart, raised his estimate from 0.8% in December to three percent. Brian Kasman of JPMorgan Chase & Co. increased his forecast from one percent to 3.3%.

Why the exuberance? One of the leading indicators of economic growth, they maintain, is the healthy housing market. New home construction in 2013 is expected to total 970,000, up from 780,000 in 2012 and the largest number since 2007, just before the Great Recession. Existing home prices are also up; February prices were up 11.6% year-over-year, the largest increase since November 2005. (Source “Existing-Home Sales and Prices Continue to Rise in February,” Realtor.org, March 21, 2013.)

According to a Fannie Mae study, 48% of Americans think home prices will rise in 2013; only 10% think they will slide. (Source: “Consumers’ Positive Housing Attitudes Withstand Fiscal Concerns; Many Indicators Holding At or Near All-Time Highs Despite Sequester,” Fannie Mae, March 2013.)

Oddly enough, not everyone is in agreement. A survey released by the MacArthur Foundation found that more than half of those surveyed said they do not believe the housing crisis is over, and 20% believe we have not seen the worst of it. (Source: “How Housing Matters: Americans’ Attitudes Transformed By The Housing Crisis & Changing Lifestyles,” MacArthur Foundation, April 3, 2013.)

U.S. economist Robert Shiller (co-creator of the Standard & Poor’s/Case-Shiller Home Price Indices) said that the U.S. is living in an artificial real estate economy, pointing to the Federal Reserve’s mortgage-backed quantitative easing policies and record-low interest rates. He also said it could take as long as 40 years for U.S. housing prices to reach pre-2007 levels. (Source: Sandholm, D., “Don’t Get Snookered by Rising Home Prices, Shiller Warns,” CNBC, March 26, 2013.)

There’s more to the housing market than just seemingly rosy numbers. For starters, building permits have declined since January. Overall housing starts climbed seven percent in March, but that was primarily a result of multifamily starts, which were up 31%; single-family starts were down 4.8%. (Source; Badkar, M. “Housing Starts CRUSH Expectations Rising 7%, But Permits Fall 3.9%,” Business Insider, April 16, 2013.)

Homebuilder confidence is on the decline. In December 2012, homebuilder confidence climbed to 47, the highest level since 2006. After eight straight months of sequential increases, homebuilder confidence hit a wall in January and has been sliding ever since, hitting 42 in April. (Source Badkar, M., “Homebuilder Confidence Misses Expectations, Falls To 42,” Business Insider, April 15, 2013.)

And foreclosure rates are picking up steam. In March, 152,500 properties received a notice of foreclosure, down one percent from February and 23% from March 2012—good news! But at the same time, foreclosure starts were up two percent in March at 71,113, the second straight monthly increase. (Source: “U.S. Foreclosure Starts Edge Higher For Second Straight Month in March as Bank Repossessions Continue to Drop,” RealtyTrac, April 9, 2013.)

Until the U.S. housing recovery is in full swing, investors looking to diversify and strengthen their retirement portfolio might want to consider equities that benefit from properties already generating revenue.

Healthcare Realty Trust Incorporated (NYSE/HR) invests in, develops, and manages medical office buildings, clinics, surgical centers, and rehabilitation facilities. The company also provides an annual dividend near 4.1%.

Inland Real Estate Corporation (NYSE/IRC) develops shopping centers and retail properties in the Midwest region of the U.S. and provides an annual dividend of 5.1%. National Retail Properties, Inc. (NYSE/NNN) acquires, develops, and manages freestanding retail properties in heavily traveled commercial and residential areas, providing an annual dividend of 4.3%.

Clearly, the U.S. housing market has further to go before we can call it a recovery. Investors looking for both capital gains and cash flow might want to consider adding real estate investment trusts (REITs) to their investment portfolio.

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