Expect a House Price Slump, But No Worries for REITS

Excerpt from our One Page Annotated Wall Street Journal Summary (which you can get emailed to you every morning by signing up here):

MUTUAL FUNDS QUARTERLY REVIEW: Surviving a Real-Estate Slowdown

• Summary: Interview with CGM Realty Fund manager Kenneth Heebner. His key points: A significant decline in house prices is coming, with hot markets such as California, Arizona, Florida and the East Coast hit particularly hard. Prices have been set at the margin by people using interest-only and pay-option adjustable rate mortgates; many of them will end up defaulting on thier mortgages, leading to a rise in foreclosures and steep price declines. Evidence that points to future housing price declines include the rapid rise in inventories of unsold homes. He sold the last of his homebuilder stocks in the first half of last year. When the extent of housing price declines becomes apparent, the Fed will pause raising interest rates, and that will avert an economic downturn. "Commercial real estate has a totally different outlook than residential housing." Office and apartment REITs are attractive because growing inability to purchase a home pushes up rents. The most attractive apartment and office REITS are in areas where new supply is constrained; they include Archstone-Smith Trust (ASN), Essex Property Trust Inc. (ESS), SL Green Realty Corp. (SLG), AvalonBay Communities Inc. (AVB) and Vornado Realty Trust (VNO). Hotel REITs will do well as the falling dollar will spur tourism and supply is constrained as few hotels were built after 9/11. He owns Host Hotels & Resorts (HST), LaSalle Hotel Properties (LHO) and FelCor Lodging Trust (FCH).