It's All REIT

By Charles Delvalle

“The housing market is crashing!”

If I had a dime for every time I have read that... well, you know the rest. The truth is, reports of a nationwide housing market crash are overblown.

The housing market in Florida, California, and Nevada is cooling off real fast. But the U.S. has never had a national real estate bust.

That’s what makes Real Estate Investment Trusts (REITs) with geographically diversified real estate portfolios one of the safest investments you could make.

REITs in general don’t lose value unless a huge economic shock hits the market.

According to the National Association of Real Estate Trusts, that’s the only time the market values of REITs as a whole have trended down.

REITs went down after the crash of 1987, as you can see. Then they boomed along with the economy. They suffered another sharp drop during the Asian economic crisis of 1997 to 1999. They then boomed along with the economy once again, even surviving 9/11 and the minor recession of 2001-2002, making a new high in 2004. And now here we are.

So the question remains, will next year be the dawn of a deep and extended recession? Or will it be something less dramatic, like Andrew Gordon’s typical Saturday night out?

All indicators point towards an economy that is experiencing a gradual slow down — the proverbial “soft landing” that Bernanke says is within reach.

And he just may be right for these two reasons.

1. Reduced gas prices will bolster consumer spending.

Let’s say at $3 a gallon, you spend $51 to fill up your 17 gallon tank. Now that gas is at $2.30 a gallon, you are instead spending $39 to fill up. Doing that four times per month would save you $720 on gas in one year.

That’s not a huge savings, but spreading that across the 120 million drivers in America adds up to over $86 billion. If we assume that only one-third of this money is spent on consumer goods, that’s still $28 billion dollars which would help buffer a fall in consumer spending.

A number of indications, including lower demand in America and slowing demand in China, point to gas prices remaining low this year and next.

2. U.S. exports will bolster U.S. economic activity.

As Asia industrializes, it’s going to need more U.S. products. As U.S. businesses receive more orders from Asia for airplanes, services, and software, it will help make up for any slippage in domestic sales.

This puts a soft floor on how far U.S. business will drop (barring a worldwide economic slowdown).

While most economists are glumly focused on what we import, they have ignored our record-breaking pace of exports that we’ve maintained throughout the year.

Both of these factors make a recession less likely. And as long as a recession doesn’t materialize, the real estate market in most sectors (housing being the biggest exception) should continue to do well.

With the real estate market looking secure, you have a perfect opportunity to get into a REIT that is well diversified among commercial and industrial properties. Not only can a well diversified REIT shelter you from a real estate slowdown in the housing sector, but they also allow you to reap the benefits of a high yield plus capital gains.

Good Investing,

Charles Delvalle