Real Estate Is Nowhere Near Its Bottom

Includes: GOOG, PSR, RWO, SCHH, VNQ, Z
by: Simit Patel

With real estate ETFs like VNQ developing strong trends and heading back near where they were in 2008 before the big collapse sent them tumbling, it's worth asking: is real estate ready for a comeback?

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To put it simply, no. Real estate is nowhere near its bottom; while I wouldn't short it (because I wouldn't short anything in an environment where MZM is rising), I'm certainly not bullish. The reasons for this are twofold:

1. The real estate market is a function of the credit markets; in other words, real estate is typically purchased with financing and debt -- with some concept of shared ownership. Due to monetary policy employed by the U.S. Federal Reserve and the central banks that mimic the Fed's policies to preserve the U.S. dollar system, the price of debt -- meaning the interest rate -- has been too low for too long (decades, going back to the policies of Federal Reserve Chairman Alan Greenspan back in the '90s). This has fueled our current global debt crisis, the resolution to which will involve a market correction sending interest rates much, much higher. When this happens, markets that are a function of credit buying -- such as real estate -- will see dramatically reduced buying demand, thus price. Real estate investors looking for the next bull market in the entire real estate sector should wait until interest rates rise and a greater number of sellers who demand purchasing with no credit, or offer greatly reduced prices for doing so. Serious buyers should position themselves to be able to make all-cash purchases. The market in Daet is an example of what may become more common.

2. Real estate is coming off a bubble; markets that are coming off a bubble leave such scars in the minds of investors that it generally takes decades to build the requisite faith up again. Consider how Nasdaq is still near half the value it was at in nominal terms relative to its value during the dot com bubble. Likewise, after the stock market crash in 1929 that set off the Great Depression in the United States, U.S. equities did not return to that level in equities until 1954.

Big Trends in Real Estate: Charter Cities and Location-Based Social Networking

In terms of trends that will drive the next sector-wide bull market in real estate, look for two catalysts: charter cities and location-based social networking. Both tap into the notion that cities are what truly drive real estate values, and thus creating flourishing cities constitutes the best way to create real estate value. I suspect "smart money" -- the capital that gets bull markets started before momentum buyers come in -- in real estate may thus benefit from exploring trends such as charter cities, which have the potential to create new cities, as well as location-based social networking, which is in the process of re-wiring cities entirely. Monitoring the activity of Google (NASDAQ:GOOG), Foursquare, Facebook, Zillow (NASDAQ:Z), and AirBnb amongst others can help identify what geographic locations constitute promising real-estate investment opportunities.

And of course, the game now is global -- though I hold the view that we are in a transitional period in which the safe haven economy is moving from the West to the East, and will follow a cyclical pattern throughout the globe. I believe real estate investors cognizant of this reality will be better positioned to see the entire economic opportunity.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.