Recs

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Will Real Estate Lead the Recovery?

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Real estate got us into this mess in the first place. Will it also get us out?

Given how severe the economic crisis has become -- with soaring unemployment, an economy in recession, and dark prospects for the foreseeable future -- it's easy to forget how it started: in the smallish subprime niche of the mortgage market. Yet despite the extent to which problems have spread throughout the economy, many still believe that solving the crisis means solving the real estate market.

A tale of two markets
The first thing to remember about real estate is that you can't lump it all into a single category. So far, most of the damage you've seen in real estate has hit the residential housing market. For instance, when you read about the Case-Shiller index showing record double-digit drops in prices year over year, you're focusing completely on single-family homes.

But obviously, that leaves out a huge segment of the residential market. Those who own condominiums have seen significant drops too, but because the market can act much differently from the single-family home market, condo owners in major markets have seen smaller losses than those who own houses.

Going commercial
From an even broader perspective, real estate encompasses far more than where people live. So far, commercial real estate -- including the office buildings where people work and the shopping malls and grocery stores where they buy things -- has largely escaped the notice of most investors, at least compared to the woes of the housing market.

Yet concerns within commercial real estate have been on the rise lately -- and are starting to overshadow housing troubles, especially for investors. To get a sense of how the worries are shifting, compare how these big homebuilders have done over the past year ...

Stock

1-Year Revenue Change

1-Year Stock Return

Toll Brothers (NYSE: TOL  )

(40.2%)

(5.8%)

Pulte Homes (NYSE: PHM  )

(43.2%)

(13.8%)

NVR (NYSE: NVR  )

(36.3%)

(27.3%)

Ryland Group

(38.2%)

(27.5%)

Source: Yahoo! Finance.

... with the performance of some major commercial real estate investment trusts (REITs):

Stock

1-Year Revenue Change

1-Year Stock Return

Simon Property Group (NYSE: SPG  )

(0.6%)

(42.8%)

Vornado Realty Trust

2.6%

(35.2%)

Kimco Realty (NYSE: KIM  )

10.4%

(58.5%)

General Growth Properties (NYSE: GGP  )

(5.7%)

(97.6%)

Source: Yahoo! Finance.

You can really see the difference in the way investors perceive the two markets. For homebuilders, revenues continue to fall dramatically, but shareholders seem reluctant to push prices down much further. In contrast, REITs have seen their revenues hold up much better, yet their shares are taking a pounding -- perhaps in anticipation of big revenue declines ahead.

Where to put your money
Given how hard it is to predict anything related to the economy, is now a good time to invest in real estate? That's a topic that Foolish retirement expert Robert Brokamp picks up in this month's issue of Rule Your Retirement. In looking back at the history of real estate investing, he notes that while REITs have had extremely high valuations for years, the combination of low share prices and high yields now make them look more attractive than they have in a long time.

But that's not to say they don't face big challenges. Ailing retailers like Circuit City and Sharper Image were mainstays across the country, and when they go belly-up, it's tough to find anyone to take over their space at your local mall. And anytime you see a Starbucks (Nasdaq: SBUX  ) location close its doors, there are investors who have suddenly lost a valuable stream of income they were relying on.

Despite great arguments on both sides, Robert doesn't hesitate to give his view. To see what he's doing with his money, all you have to do is take a look at the latest issue of Rule Your Retirement. Not a subscriber? No problem -- a free 30-day trial gives you full access and is yours for the asking.

For more on investing in hopes of an economic recovery, read about:

Fool contributor Dan Caplinger owns a home in an area that hasn't seen terrible declines -- at least not yet. He and the Motley Fool both own shares of Starbucks, which is a Motley Fool Inside Value selection and a Motley Fool Stock Advisor pick. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy keeps our roof over your head.


Read/Post Comments (3) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 09, 2009, at 5:51 PM, JakilaTheHun wrote:

    I've been looking into REITs lately, as well. I think they might be the surprise story for 2010 - especially if inflation hits.

  • Report this Comment On February 09, 2009, at 6:23 PM, tjboyd00 wrote:

    Run as fast as you can away from these. They are highly leveraged, high management fee vehicles which have held up because they have refinanced higher interest debt. When the mall has vacancies these guys crash and burn. The stocks have dropped because there are a lot of institutional investors getting out because they know the imminent results. Check the performance in the last recession of any of these that were in existence. I don't know if they even have 10 year histories!

  • Report this Comment On June 02, 2014, at 9:54 PM, elijed23 wrote:

    I know that real estate has been slowly recovering over the last few years. Is it considered to be fully recovered since the problem in 2008? I know the economy is really dependent on the real estate situation.

    Elisa Jed | http://www.jeanwrightrealestate.com/northshorecommunities

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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