Is this a good time to buy into a REIT? A good time to buy a house to live in? To buy a secondary house for rental income? Billionaires John Paulson and Warren Buffett have made their views clear:
They say to buy up housing and get real estate exposure, because interest rates are low, housing is bottoming soon and the income potential is something you'll be wishing you'd acted on a couple of decades down the road.
What Warren Buffett Thinks
Last month, Buffett said something that raised some eyebrows. Talking about the current real estate market, Buffett explained that, if he could find a way to manage them, he'd buy "a couple hundred thousand" single-family homes. His argument was simple: Houses are cheap, interest rates are extremely low (under 4% as of right now), and buying a house is a way of kind of shorting the dollar with the ability to refinance later -- something the bank won't be able to do. This is especially true, according to Buffett, since there are "more households being created than houses". The Oracle from Omaha went even further, telling the interviewer that if he was a young investor, he'd likely pick housing over an equity index fund.
John Paulson, Casey Research, and the Middle Ground
Buffett isn't alone on this. Two years ago, John Paulson- perhaps prematurely- said:
"If you own one home, buy another one, and if you own two homes, buy a third and lend your relatives the money to buy a home."
Not everyone agrees. Earlier today, a friend of mine posted an article on something written by Casey Research, a company I admire greatly. The article was skeptical of a house being a good investment, and put it in the same camp as some sort of ponzi scheme. I think that sentiment is ludicrous, especially when factoring into account inflation, cheap rates, and the fact that owning a house rather than renting means a huge bill no longer needs to be paid -- that's financial security.
If both housing and mortgage rates are both bottoming this year, then this is essentially a once in a life-time opportunity for investors who want to exploit the heck out of both the interest rates and the market itself.
Is It a Good Investment?
The Fed can't target interest rates at 0% forever, and whenever interest rates increase and the economy continues to "recover", we'll likely see mortgage rates follow suit become much higher than they currently are.
By that time, housing prices will likely be flat or up. The longer time frame we're talking about, the more likely the above is true. In 15 years, not only will housing have likely recovered, but the interest rates will likely be higher, as the Financial Forecast Center predicts for this year alone.
Investing in a REIT likely depends a lot on the fund in question, as not all are the same. Annaly Capital Management (NLY), AvalonBay Communities (AVB), and Boston Properties (BXP) will simply perform differently.
"Investing" in a house to live in also depends a lot on one's credit, interest rates available, and the market. But for the average person who can afford it, it offers a great opportunity. Average 30-year-fixed interest rates for houses are under 4% right now. I've made a big deal about staying away from debt, but this might be too much to handle. It's essentially a way to short interest rates, enter a must-be-bottom-soon market, build equity, and replace a huge monthly bill over time. Buffett and Paulson are probably right.