If I am lucky enough to win the Powerball Jackpot, now estimated to be worth a half a billion dollars, before putting a penny of it toward anything -- including even debt repayment -- I would buy real estate. I would buy a home, a second home, a vacation home, income-producing property (especially residential rental) and land -- all of it. I say this because I believe the current period offers a unique and special opportunity that may not again exist for a lifetime. This is not the first time I've suggested investors look to the real estate asset class for capital allocation. Neither will it likely be the last, because I see the opportunity as so special and also fleeting.
It should be clear now that real estate prices are on the rise, with S&P Case Shiller and the FHFA each reporting on September price increases just this week. The Case Shiller data showed the sixth consecutive month of price increases for the 20-City Composite Index stretched across most of the 20 metropolitan regions measured. The 20-City Composite was 3.0% higher versus last September, and higher still compared to the August increase of 2.2% and July rise of 1.1%. The improving trend should be evident.
Now, at the same time prices are rising, the cost of homeownership is as affordable as it has ever been for those capable of qualifying for a mortgage. The Federal Reserve and the Federal government have done all they can to make it so, with a keen eye toward reviving the historically critical sector and driver of economic growth. Mortgage rates seem to set new records with each passing week as the Fed engages in its quantitative easing program.
Still, while rates are at historical lows, they may not remain there for very much longer. Events threaten that could set off a sort of economic fishtail effect -- something I talked about at my blog in its early days and a term I have copyrighted. (You may refer to it, as long as you attribute me and my blog for its initial usage.) Much like the fishtail effect incurred by a driver on an icy road, I believe the government and Federal Reserve actions and inactions of the past several years will eventually see an end least intended -- higher interest rates -- as we overcompensate for the financial crisis and economic recession just passed. One such event could be just weeks away, while many threaten to change the rate environment and cost of home ownership.
For example, if the United States sovereign debt rating is downgraded by a second rating agency, like Moody's (MCO), following its cut by Standard & Poor's (a subsidiary of McGraw-Hill (MHP)), funds holding U.S. Treasuries will be forced by charter to unload those Treasury securities. I suppose charters could be changed, but lawsuits could follow and the same result could ensue. Such sale activity, or rejection of demand, would raise the cost of borrowing for the United States and increase all other rates as well. The "risk-free" rate would no longer be so riskless.
Many asset classes should be affected in a negative manner due to ties to the risk-free rate, except for hard assets with utility or currency value, and the money would have to go somewhere. This includes real estate and I suppose some real estate-related assets, like perhaps the iShares Dow Jones US Real Estate ETF (IYR), the PowerShares Active U.S. Real Estate (PSR), the Vanguard REIT Index ETF (VNQ) and the First Trust S&P REIT Index (FRI). Of course, in lieu of fiat currency, I like gold and gold-related securities like the SPDR Gold Trust ETF (GLD), and silver and silver-related securities like the iShares Silver Trust ETF (SLV). I think smart money has been finding these assets over the past several years at least partly because of this possibility.
As attractive as rates and prices are today, investors who can buy real estate have no excuse for not doing so, in my estimation. If I won the Powerball Jackpot amounting to approximately $500 million, real estate would be one of the first places I would look to invest it. As a leading contributor on the real estate sector at Seeking Alpha, readers may have interest in following my column here.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.