The slowdown in the real estate market is now a reality and I am glad to see that it has been gradual until now, as a steep decline will certainly push us into a recession. I have been negative on public companies that build homes since September 2005 as you can see from this blog post titled "Housing Sector in Pain".
This MarketWatch.com article about a 67% increase in mortgage defaults in California also confirms the slowdown. In recent weeks my newsletter subscribers have asked me if it is still a good idea to "short" home builder stocks. While I was almost certain in September 2005 that their valuations were very high in the face of a declining market, I cannot say the same at this point. Moreover I personally prefer not to sell stocks short. However I would not suggest going "long" the home builders at this point either as they are likely to be dead money until the next housing cycle starts.
But there may be a way to benefit from housing as far as investors are concerned. Thanks to the large number of first time home buyers over the last five years, apartment rents have mostly stayed stagnant or have seen only modest increases. However as housing prices on the coasts have spiraled out of reach of average home buyers and mortgage defaults have risen, I can see apartment rents slowly creep back up. I see this trend continuing as more and more people give up houses they can no longer afford because they used exotic mortgages. But I can only speak for Oregon and certain parts of California.
Are apartment rents rising in your area? If they are, then investing in apartment REITs (Real Estate Investment Trusts) that offer a high dividend yield may be a good idea. The downside is that the negativity in the rest of the housing market may spill over to apartment REITs and drive them lower as well.
As soon as I find additional information about apartment REITs, I will post it on this thread. I look forward to your responses.
