Yes, prices are still declining slowly – the S&P-Case-Shiller index of house prices was down 3.7% in November 2011 from the previous year.
But that’s mostly downward momentum and the effect of the still large inventory of homes either going through the foreclosure process or waiting for better sale conditions.
Housing’s Upward Trajectory
With building activity and builder confidence increasing, and mortgage rates close to record lows, the overall trajectory is clearly upwards.
Of course, a rise in interest rates could derail this. But Federal Reserve
Chairman Ben Bernanke has said he is keeping short-term rates close to zero until late 2014.
While short-term rates are so low, any rise in long-term rates would just make it even more profitable for banks and mortgage REITS to borrow short-term and invest in mortgages.
That means mortgage rates won’t go up far, and won’t derail the housing recovery.
Of course, a surge in inflation could derail Bernanke’s plans, but that would make houses more affordable, since wages would rise in nominal terms with prices.
What’s more, both political parties are practically committed to continuing a system in which government policy favors housing, with interest tax deductible and many mortgages guaranteed by the government.
Now that we have reached what looks like a solid housing bottom, investors are right to wonder how to invest.
Within housing, the important trend is that towards apartment building rather than single-family homes.
That too makes sense since home ownership is in decline but the population continues to increase and job creation is quite healthy.
Thus the rental market seems stronger than the housing market as a whole.
That’s confirmed by the details in the February consumer price index, which show that rents have risen by 2.4% in the year to January, compared to a decline in the Case-Shiller home price index
How to Invest in the Housing Bottom
For investors there are two possible ways to play it.
First, if the area where you live is in decent economic shape, you should consider taking advantage of current low prices and good mortgage availability to purchase either rental homes or ideally a small apartment block.
With financing cheap and rents rising, the economics of this are especially favorable at the moment.
Of course, you will either need to be good at home maintenance or have good repair people available, because your tenants will need their plumbing fixed. But if you can handle that, local rental real estate
, bought cheaply, can be a good use of spare investment capacity.
That doesn’t mean you should rush off to North Dakota, which has the nation’s lowest unemployment rate.
Not only is it remote, but the costs are much higher, and the chances of being ripped off by the unscrupulous are very great. Buying an apartment in the heart of the “fracking boom” in the Bakken Shale may give you great “cred” at parties but don’t get too tempted.
With these types of investment, it’s usually a good idea to keep it local.
Another way to invest in this trend is with an apartment REIT such as UDR Inc. (NYSE:UDR).
UDR specializes in middle-market apartment developments, with 60,465 apartments including 2,626 under development as of the end of 2011.
The company recently announced fourth quarter earnings, which showed funds from operations were up 25% from the previous year. UDR also increased its dividend to $0.88 per share for 2012, giving it a 3.5% yield.
For investors UDR offers an attractive mixture of increasing income and capital growth along with rental market strength and incipient inflation both helping its performance.
It’s been a long hard road but the worst of the housing bubble has come and gone.
Related: iShares Dow Jones US Real Estate ETF (NYSEArca:IYR), SPDR S&P Homebuilders ETF (NYSEArca:XHB), D.R. Horton (NYSE:DHI), Toll Brothers (NYSE:TOL), KB Home (NYSE:KBH), Lennar Corporation (NYSE:LEN).
Martin is a Contributing Editor to both the Money Map Report and Money Morning. An investment banker with more than 25 years’ experience, Hutchinson has worked on both Wall Street and Fleet Street and is a leading expert on the international financial markets. At Creditanstalt-Bankverein, Hutchinson was a Senior Vice President in charge of the institution’s derivative operations, one of the most challenging units to run. He also served as a director of Gestion Integral de Negocios, a Spanish private-equity firm, and as an advisor to the Korean conglomerate, Sunkyong Corp. In February 2000, as part of the Financial Services Volunteer Corps, Hutchinson became an advisor to the Republic of Macedonia, working directly with Minister of Finance Nikola Gruevski (now that country’s Prime Minister). The nation had been staggered by the breakup of Yugoslavia – in which 800,000 Macedonians lost their life savings – and then the Kosovo War. Under Hutchinson’s guidance, the country issued 12-year bonds, and created a market for the bonds to trade. The bottom line: Macedonians were able to sell their bonds for cash, and many recouped more than three-quarters of what they’d lost – to the tune of about $1 billion. Hutchinson earned his undergraduate degree in mathematics from Cambridge University, and an MBA from Harvard University. He lives near Washington, D.C.
If you don’t have the ability or the buy-in capital for foreign currencies, you may want to consider an investment strategy that can prosper through a crashing dollar. To learn more about one such plan, click here for the latest presentation.