Real Estate Shifts Into A Higher Gear

Includes: AIV, EQR, XHB
by: Markos Kaminis

At the start of the housing revival, a majority of the growth was found in multi-family construction. That was of course due greatly to a struggling economy, tighter credit conditions and rising demand for rental units. While there's still a concentration of strength in the multi-family segment today, single-family housing is clearly participating in an intensifying manner as well. While I like all real estate over the short term, my perspective for the longer term favors real assets, including real estate, and rental unit providers, but not single-family home builders.

The latest Housing Starts data was published last week for the month of December 2012. It showed housing starts running at an annual pace of 954,000, well ahead of the economists' consensus forecast of 887,000 and November's pace of 851,000 (revised). Once again, there was strength in multi-family property construction, with starts of residential properties of 5 units or more up by 23.1% over the November pace. Relative starts were up 115.7% over the rate of activity from a year ago. Today's new housing market, however, is well-rounded. Starts of single family homes were also up nicely, rising 8.1% over November and up 18.5% over last year's December pace.

The housing starts news was immediately embraced by investors in housing stocks, with the SPDR S&P Homebuilders (NYSEARCA:XHB) charging ahead by 1.6%. The shares of many individual builders fared even better, with Lennar (NYSE:LEN), PulteGroup (NYSE:PHM) and Toll Brothers (NYSE:TOL) exceeding the XHB. Population growth, debt consolidation efforts for many Americans, and very little new supply added over recent years, has finally allowed for clear recovery in new home sales.

However, I don't expect the fervor in builder stocks to last as long as the gains in real estate assets do, because I see a key catalyst in price increase coming from depreciation of the dollar. In fact, I believe many Americans could even be priced out of homeownership if interest rates rise and home prices increase in dollar terms as I expect. So the window of opportunity could be small and closing for real estate investors.

Despite the very serious challenges I see on the horizon for the economy and the nation, I believe the current opportunity in real estate is special, especially in rental units. Furthermore, I see real asset values rising significantly in the years ahead, though this time not due to a bubble but due to damage to the dollar (and this is not the first or even the fifth time I've warned of this). A great many more people are finally getting on board with this viewpoint, including it seems the head of the IMF and the nation of Germany (requesting possession of its gold). If politics play a role in the United States not meeting its obligations (due to debt ceiling debate), and another downgrade of U.S. credit occurs, I believe President Obama's and Madame Lagarde's usage of terms like "globally catastrophic" are perfectly appropriate in describing the consequences. Even if the debt ceiling issue is mitigated properly, our current path seems to be leading to that same fiery end (read burning dollar bills). Thus, I reiterate my recommendation for the purchase of real estate where and when you can get it for capital appreciation, and also for basic shelter if you need it and can afford it. Equity investors should also benefit from inclusion of residential REITs like Apartment Investment and Management (NYSE:AIV) and Equity Residential (NYSE:EQR), as homeownership rates remain pressured.

In conclusion, the very short term could stay supportive of all real estate, including more participation in the single-family segment. However, my view for the longer term favors rental unit and real asset rise, and continues to look for a weighing economy and rising costs of homeownership to eventually impact the homebuilders. Though those builders holding land inventory might retain some market value on a similar increase in book value, and stay afloat if they can sell off assets. I reiterate: I would buy real assets including real estate now. This is clearly a unique and ballsy perspective; the sort you can only find from unbiased, independent research, and out-of-the box thinking. But it's also the same resource that warned you of the real estate collapse and financial crisis when others thought that was far-fetched. We look forward to your continued support.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.