Five Ways For Investors to Play the Market

Sure, you could have bought a condo in Palm Beach back in 2003, and cleared a few hundred thousand after prices skyrocketed 30-40 percent in 2004 and another 15-20 percent last year. But, given that a major home building index has fallen nearly 38 percent so far this year, maybe you’re starting to feel like you lucked out, rather than missed out?

The question, Business Week asks, is whether you brave enough to bet against conventional wisdom and invest in real estate now.

If you are, forget about finding short-term slam dunk investments. Just get that out of your head right away, because it’s not gonna happen. There are still there are a handful of ways to approach investing by timing the market and making wise allocations, however, and analysts have generated five ideas to help you if you are thinking about investing in housing. Don’t expect to get rich via these tips, but they might help you considerably down the line.

1. THINK LONG TERM

Mark Zandi, chief economist for Moody’s Economy.com, predicts existing home sales will fall this year, next year, and again in 2008. He figures home prices will rise 4 percent nationally this year (compared with 13 percent in 2005 and similar growth in previous years), and inch up 1 percent in 2007, and by that much again in 2008.

Doesn’t look good, right? After the 1990-91 recession, it took the market until about 1995 to get healthy again. The recovery probably won’t be as tough this time, however, because the job outlook is much better. It helps that a stagnant Florida housing market isn’t coming at the same time as major defense cuts and overall economic recession, as we saw in the early 1990s. But don’t look for it to turn around overnight, either.

2. KEEP YOUR EYE ON THE… CENDANT

The conglomerate Cendant is splitting into four companies, three of which start trading publicly on August 1. The one that matters here is Realogy, by far the nation’s biggest real estate agency, owning the likes of Century 21, ERA, and Coldwell Banker. Its relationships reach 25 percent of U.S. existing home sales that use a broker.

Realogy is so big that it can serve as a gauge of housing in general. If you think the decline will be manageable followed by an eventual resumption of a long-term secular trend, investing in Realogy is a good thought. However, the business is not super as of right now. The company hopes to beat the industry’s lagging performance in 2006 by focusing on high-margin, franchising businesses that usually gain ground even in recessions.

3. THINK GEOGRAPHICALLY, AND IN TERMS OF VALUE

When looking to invest in real estate, it pays to look for companies with more exposure to segments of the housing market that have not had big runups in prices.

In other words:

• More Texas real estate.
• Less Florida real estate.

Almost all the big builders are heavily exposed to the Sunshine State, leaving them vulnerable as Florida home loan costs edge upward and demand cools. Dallas-based Centex, however? Here you have a company that has less debt than most of its counterparts and gets at least some of its revenue from construction services (in other words, non-residential work). Think about it.

4. DON’T CHASE PERFORMANCE

One of the real estate plays that has done better than most is real estate investment trusts (REITs) tied to apartment buildings. REITs offer steady income since they pay out at least 90 percent of their taxable income as dividends. Plus, deteriorating affordability for home buyers will boost occupancy of multi-family homes. On the flip side, apartment REITs have gotten very expensive, and average less than a 4 percent dividend yield.

5. BIG BRANDS GAIN IN RECESSIONS

This is especially true in the business of home building, where access to capital and ability to hold on during tough times play such a large role. But it’s also true for mortgage brokers. You can probably buy the leaders a year from now and get them at least as cheaply as you can at present. But the housing recession isn’t a depression, and there will be a big, vital industry left standing when the storm passes.