Why Invest In Real Estate Now?
By: Nevin Sanli
Written for The Investor Insight Newsletter
Investing in today’s economic climate presents daunting challenges for individuals and institutions. The wild swings of the public trading markets and significant geopolitical problems compounded by an ever smaller and interdependent world moving at digital speed pose massive analytical problems for money managers. Safety and simplicity may provide refuge as the complexity of the world overwhelms us.
Let us look at the data. From a peak of 15,093 in October, 2007, the Dow Jones Industrial Average (DJIA) dropped to a low of 6,627 or by -56.1% in March 2009. Today, it closed at 12,025 or up by +81.4% since March 2009. Since October, 2007, DJIA is down -20.3%.
Economic uncertainty in Europe, mainly in Greece, Portugal, Italy, Spain, and to a lesser extent in several other countries, has had ripple effects across the world as the second most-widely circulated currency, after the US$, appears to be crumbling. European economies are slowing their demand for imported goods from China, Turkey, the US, and other countries, thereby further eroding worldwide economic growth. In the face of these major economic challenges, EU leadership may not be strong enough to mitigate the damage already done and the after-shocks.
Substantial geopolitical instability in the Middle-East is putting pressure on oil prices with consequential negative impact on consumers and many businesses.
Domestically, Washington is trying to deal with an 8.6% unemployment rate, down from 9.2%. However, unemployment is much higher when you include individuals that have exhausted their benefits, have stopped looking for work, and who have taken positions at much lower pay just to put food on the table. We have a sizeable percentage of our workforce waiting on the sidelines or underemployed.
Washington’s debt load, that most economists believe is unsustainable, is restricting our governments’ (congress, White House, States, and others) ability to create jobs. Personal real estate wealth has eroded over the last 5 years, thereby reducing Americans’ desire to splurge on consumer goods.
Global interdependence and digital speed magnify and compound these problems.
Considering this unusual environment, there is a probability that the stock market will continue to gyrate up and down. And yet, there are some positive signs - employment is better, corporate cash is plentiful, consumers are timid but are back, car sales are good, thus indicating a slowly recovering US economy, which will be the engine pulling the rest of the world along.
Simplicity, caution and discipline will be the foundation for preserving and modestly increasing wealth for the next ten years. A cautious and simple real estate strategy which focuses on untapped sectors within the larger market is one of the ways to balance your portfolio.
There most likely will not be large increases in home prices, like we have seen in the past, as there are too many complicating factors weighing on the sector. However, overall real estate prices will start to come back – probably in the next twelve months (see accompanying chart) and we need to be positioned to take advantage of this upswing.
It is also likely that, as a result of government stimulus programs, we will have inflation. During inflationary periods paper assets - stocks, bonds, mutual funds, and cash will lose value; hard assets - precious metals, real estate, commodities and oil, will rise in value and provide a hedge against the loss in spending power of paper assets.
We are therefore cautiously optimistic that investing in a sound real estate program will provide opportunities, less volatility and a hedge against inflation. A simple approach, moderate leverage, and proprietary deal flow and methodology, will enable investors to protect their position.