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Data has taken on an increasingly more important role today than five years ago because of the sheer growth in the volume and richness of it. Once you truly understand what data you have, you then can build reasonable objectives, centered on improving return on investment through better data "decisioning", according to Mike Cousineau, CEO of Paradysz.

The latest data from Fiserv Case Shiller shows home prices in the U.S. expected to decline 3.6% into mid-2012, and then rebound 2.4% in second half of 2012. There are enormous yet conflict data regarding housing prices. How can we benefit from uncertain housing markets?

Population Growth Drives House Prices

House prices are based on many factors, including interest rate, inflation, economic growth, employment, income, rental prices, construction costs, property taxes, maintenance costs, supply and speculation, etc However, one of the key factors is the population growth, especially in metropolitan areas where land supplies are inelastic.

Table below shows population growth rates for the last 20 years in 3 major North America metropolitan regions: Los Angeles, New York and Toronto:

Metropolitan

1990 to 2000

2000 to 2010

Los Angeles

9.7%

3.7%

New York

8.8%

3.1%

Toronto

20.3%

22.6%

Following chart compares house price indexes for these 3 areas. Data are from S&P Case-Shiller and Toronto Real Estate Board (January 2000=100). Toronto population grows much faster than LA and NY, its house price index is higher and could be more sustainable than NY or even LA.

Information technology is changing the world, making it more idea-intensive, better connected, and ultimately more urban. Electronic interactions won’t make face-to-face contact obsolete. The computer industry is the place where one might expect remote commutation to replace person-to-person meetings. Yet despite its ability to work at long distances, this industry has become the world’s most famous example of the benefits of geographic concentration. Technology innovations that could easily connect electronically pay for some of America’s most expensive real estate to reap the benefits of being able to meet in person, according to Edward Glaeser, author of "Triumph of the City."

REIT

In addition to buy a house directly, another way is through REIT. REITs tend to have predictable incomes that are obligated to be distributed to shareholders. Followings are top 10 REITs in the U.S.:

Name (Symbol)

P/E

Yield

AvalonBay Communities (NYSE:AVB)

76

2.9%

Boston Properties (NYSE:BXP)

86

2.1%

Equity Residential (NYSE:EQR)

16

2.5%

HCP, Inc. (NYSE:HCP)

17

5.1%

Host Hotels & Resorts, Inc. (NYSE:HST)

N/A

1.1%

ProLogis, Inc. (NYSE:PLD)

N/A

3.9%

Public Storage (NYSE:PSA)

43

2.9%

Simon Property Group (NYSE:SPG)

42

2.9%

Vornado Realty Trust (NYSE:VNO)

18

3.7%

Ventas, Inc. (NYSE:VTR)

43

3.4%

RioCan REIT (OTCPK:RIOCF)

10

5.4%

The snapback rally in REITs over the last few years came after the sector avoided the financial credit crisis. Now there are worries that the market has over priced and projections of a strong recovery are too optimistic. Bloomberg’s data shows that the average short interest vs. float ratio for 203 U.S. listed REITs was 5.3, the 5th highest among the 24 industries. In Financials sector, REIT’s short ratio is much higher than other industries such as banks and insurance.

RioCan is Canadian biggest REIT. Its P/E is much lower and yield is higher than the US REITs. ReiCan’s low P/E is mainly because of its unusual large diluted normalized EPS in 3/31/2011 quarter.

REIT ETFs

Failure of the super committee increases the risk for those healthcare REITs. Some REITs become "dumping grounds" for bad assets. To avoid picking single REITs, followings are 3 biggest REITs ETF:

Fund Name (Ticker)

Yield

Net Assets

Vanguard REIT Index ETF (NYSEARCA:VNQ)

3.6%

19.4B

iShares Dow Jones US Real Estate (NYSEARCA:IYR)

4.0%

2.9B

iShares Cohen & Steers Realty (NYSEARCA:ICF)

3.0%

2.2B

Home Builders

Home builders are also a great way to bet on the potential coming housing rebound. Growth in home construction used to be a sure route to recovery because construction is a labor-intensive and huge job-generating industry.

Homebuilders' last quarter earnings are improving and new orders and backlogs are increasing. Following table from Yahoo Finance compares 3 biggest home builders in the U.S. Yet they all have very high P/E and low margin:

Metrics

Lennar (NYSE:LEN)

DR Horton (NYSE:DHI)

Toll Brothers (NYSE:TOL)

P/E (ttm)

39

54

45

PEG (5 yr expected)

1.7

2.2

7.5

Qtrly Rev Growth (yoy)

-0.6%

15.8%

-13.2%

Operating Margin (ttm)

4.3%

3.1%

-1.3%

Stock Markets vs. House Prices

Finally, you can invest in the whole stock market, instead of houses. Following chart compares Case-Shiller 10 metropolitan regions housing prices and S&P 500. Since January 2000 (where index=100), house prices increased by 50% while S&P 500 went nowhere. However, since 1987 (which was the 1st year Case-Shiller index is available), S&P 500 increased over 300% while house prices increased by 140%. In other words, in the long run stock market wins.

Conclusion

In the early 70s, the United States had about 35 million homes with 3+ bedrooms, and about 25 million 2-parent families with children. By 2005, the number of 3+ bedroom homes had doubled to 72 million. As the Baby Boomers begin to retire, America has perhaps as much as 40% over-supply of family-sized houses, according to Mark Steyn, author of “After America.”

There is no “national’ market for home prices. With declining prices and low mortgage rates, home prices may not be expensive by traditional means such as price-to-rent ration. The key for investors is to look into fast population grow metropolitan regions. Alternatively, home builders, REITs and even the overall stock market could be better places than investing in the 2nd home.

Note: Data is from S&P Case-Shiller, Yahoo and Google Finance and is valid as of December 11, 2011.

Source: 3 Money Moves To Benefit From Uncertain Housing Markets