Don't look now, but housing could finally be on the mend. While job creation was a bit disappointing last month, housing may begin to add to the GDP instead of subtracting from it. Building permits rose to their highest level in more than three years last month, while inventories of unsold homes fall and home prices slowly creep up.
To be clear, we've still got a long way to go in working off the excesses built up in the housing bubble. I'm not predicting a return to rapid growth in this sector, but it does look like the stage is being set for a housing turnaround.
Clawing back from the bottom
A fair number of pundits have been making the rounds in recent weeks, touting their beliefs that the housing market has hit, or is near, rock bottom. Just a few weeks ago, Bank of America called the bottom of the housing market, although it doesn't expect significant gains in the housing market until 2014. Likewise, a recent Reuters poll of economists indicated that on average, economists expect home prices to stop falling this year and begin to rise next year.
But it's not just economists and market watchers who think we're nearing the end of this roller-coaster ride; money managers also see a light at the end of the tunnel and are putting their money where their mouths are. The TIAA-CREF Large-Cap Value Fund (TCLCX) has turned bullish on the housing sector. Manager Richard Cutler thinks housing is at a point where, mathematically, it can't go much lower. He has purchased homebuilder PulteGroup (NYSE: PHM ) and construction product manufacturer Masco Corp. (NYSE: MAS ) , because he thinks both will benefit when housing starts to pick up and homebuilders approach a more "normalized" earnings level. These companies fit into the fund's strategy of finding solid, well-run companies in cyclically depressed industries.
Likewise, Goldman Sachs (NYSE: GS ) has announced it is opening a new fund, the U.S. Housing Recovery Fund, which will focus on mortgage bonds. The fund will be structured as a limited partnership with a lifespan of three years. Goldman is just one of many investment managers that have opened housing-related funds in recent months. So while homeowners may not be reaping much in the way of price gains just yet, it appears that the professionals see ample opportunities lurking in the housing market.
But even if you can't pony up the $500,000 minimum to get into the Goldman fund, there are other, lower-cost opportunities for investors to take advantage of the rebounding housing market. Several first-rate exchange-traded funds track the arc of the real-estate market, including the iShares Dow Jones US Real Estate ETF (NYSE: IYR ) and the SPDR Dow Jones International Real Estate ETF (NYSE: RWX ) . Either would make an excellent core real-estate holding, depending on whether you desire domestic or foreign coverage. The iShares fund will cost you 0.47% a year, while the SPDR sports fees of 0.5%.
But given that a housing rebound is anything but certain at this time, despite some encouraging initial signs, investors may want to exercise more caution in this sector. That means instead of simply tracking a real-estate index and getting exposure to all of the companies in that index whether they are good investments or not, you may want to consider an actively managed real-estate fund. That gives you the power, through your manager, to select only the most attractive real estate investments while shunning those that may have further yet to fall.
Two of the better choices in this space are T. Rowe Price Real Estate (TRREX) for domestic exposure and Third Avenue Value Real Estate (TVRVX) for foreign coverage. Both funds feature long-tenured managers with consistent, proven investment processes behind them. The T. Rowe Price fund is by far the cheaper option at 0.76% and offers a more stable, steady ride with performance that won't shoot for the stars but will provide healthy results over time. Third Avenue Value Real Estate is more volatile and more expensive at 1.40%, but it remains a solid choice for investors who want actively managed global real-estate exposure.
Whatever road you choose to take in securing real-estate exposure, the important thing to remember is to keep your allocations in this sector on the small side. For many American homeowners, their house is their single largest asset, which means most of them already have significant exposure to the real-estate sector. And while homeowners can still benefit from owning real-estate-focused funds that focus primarily on commercial real estate, like those mentioned above, you need to be careful not to overweight this sector. Even investors who are decades away from retirement should keep real-estate funds to between 5% and 10% of their total portfolio.
Lastly, keep in mind that real estate can be a very volatile sector, as recent years have proven. So don't invest here if you can't stomach the bumps. Also, remember that the real-estate sector has rebounded strongly from its lows directly following the financial crisis. So don't expect real estate to continue producing the same level of absolute returns it has in recent years. Real estate can be a solid portfolio diversifier, especially now that the housing market looks primed for gains, but moderation and caution are key to handling this alternative asset class.
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