The Global economic recession that hit in 2008 had links to the U.S. housing bubble and sub-prime mortgages. An immediate result of the recession was the fall from grace of the real estate sector, leading to much apprehension among many with making investments into the sector. But, if we simply think of securing an income stream for the future, then its commonsense to invest in real estate.

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Comparing Real Estate to other Investments

National Council of Real Estate Investment Fiduciaries (NCREIF) cites data which states that private market commercial real estate gave returns of 8.4% during the 10-year period from 2000 to 2010. This reliable performance was achieved, together with low volatility relative to equities and bonds, for highly competitive risk-adjusted returns.

However many critics would claim that the low volatility characteristic of real estate is directly a cause of the infrequent nature of real estate transactions. Property values here are often appraised by third party valuations. The intermittent nature of transactions and appraisals smoothen the returns, as the reported property costs consider the market values to be lower during an upturn and would considerably overestimate market values during an economic downturn.

Despite the fact that notable estimates of real estate volatility should be attuned further up, real time markets are easily susceptible to sudden upturns and downturns. A valid example would be the “Flash Crash” of May 2010, where $1 trillion in stock market value just vanished in mere 15 minutes. In such an environment of uncertainty and fluctuating market volatility, real estate with considerably stable pricing is quite a promise.

Stocks and bonds have a high degree of uncertainty attached to them, whereas real estate investments are backed by a high level of brick and mortar. Real estate investment trusts (REITs), often listed as real estate securities, have regulations requiring certain percentage of profits be distributed to its investors as dividends.

Real estate investments have strong history of total return. Over a period of 30 years from 1977 to 2007, almost 80% of the total U.S. real estate return came from income flows. This helps bring down volatility, as investments which rely on income returns result in being less volatile than the ones relying heavily on capital value returns.

Ideal for Portfolio Diversification & Inflation Hedging

An added advantage of investing in real estate is its immense potential for diversification. Real estate has a low, and sometimes, negative, association with other major asset classes. This means introduction of real estate to a portfolio of diversified assets could considerably lower portfolio volatility and result in a much higher return per risk taken.

The inflation hedging ability of real estate originates from the positive association between GDP growth and demand for real estate. With growth of economies, the rising demand for real estate in turn pushes rents higher which in turn, results into rising capital values. In a nutshell real estate tends to preserve the buying power of capital, by passing on a percentage of the inflationary pressure on towards the tenants and by accommodating a portion of the inflationary pressure, as capital appreciation.

Only Reason to Avoid Investing in Real Estate

One of the main drawbacks of investing in real estate is poor liquidity, described as the degree of difficulty in trying to convert an asset into cash and vice versa. A stock or bond transaction, which can be finished in a very short time and hence liquidated fast, a real estate deal can take up to months to close and hence not easily liquidated. Even after using the services of a broker finding a right buyer can take weeks.

However, recent advances in finance practices have offered a solution to this issue of poor liquidity. This is where REITs and real estate companies come into the picture. They provide indirect ownership of real estate assets and are structured as listed corporations. They on one hand offering better liquidity and market pricing while on the other increased volatility and lower diversification.

Final Take

Real estate is a unique class of asset which is quite simple to appreciate and also can augment the risk and return profile of any investor’s portfolio. Real estate offers competitive risk-adjusted returns, with reduced principal-agent conflict and a highly attractive income source. Its portfolio diversification quality can lower volatility through diversification. Difficulty in liquidation can be a concern for some but again with REITs, poor illiquidity of real estate can be reduced.

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Gold: A Glimmer of Hope or Fool’s Paradise

Whodunit could be an easiest resort to look for the culprit behind the fiasco surrounding the doomed banking sector. While governments and economists are busy shoving off the sensitive issue of housing bubble under carpet, there is no arguing that housing bust pain still exists in the minds of many.

Nevertheless, the housing market had seen among the worst of its times in 2008, the after-impact can still be seen in the financial market as a large number of investors seem to have cornered the fairly seated banking stocks.

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While investors are shunting out banking stocks, national banks are joining hands to battle this crisis out. What the banks are left to do when they are short of investors is?, they would resort to other means for income. Notwithstanding loss, the banks have to channelize excess pressure on the customers in some or the other way to compensate for their losses.

As done by the Bank of America, as it will start charging a monthly fee of $35 if users overdraw their account by less than $10. Come June 6, the bank will no longer provide a 5% annual match for its popular Keep the Change savings program. And, revision of the monthly fees is still in offing.

Even rehauling of baking system cannot be strike-off at this moment with every single bank coming with its own unique proposal just to improve their portion. Nevertheless, few would be struggling with the defiant regulatory system, others would be making their own way else they would be at a major loss of  billions from reduced fees for overdrafts and debit and credit cards because of new regulations introduced to protect consumers and retailers.

On the hindsight, it looks that a large number of customers have to resort to community banks and non-profit credit unions, if some refreshing change is not being seen in near future. If Michael Moebs, a banking industry economist in Illinois, is to be believed, then big banks would be facing a major loss of 13 million checking accounts nationwide in 2010 and 2011. Even their share of the nation’s 130 million consumer checking accounts is expected to take a dive from 45% in 2009 to 35% by year’s end.

Contrary to this, the Michigan Credit Union League has revealed that the state’s 322 credit unions have gained over 2,600 members in the first quarter, on top of the 96,000 who joined during the last two years.

Even among all this, banking stocks have seen its good phase, when Citi, bank’s share soared 413% from its March 5, 2009, low to its Aug. 28, 2009, high. But this year, however, the stock is down 20%.  At present banks are borrowing from depositors for 0.5% to 1.5%, while lending at anywhere from 4.5% and above.  No doubt, the supply-demand composition has become a mulling point for the banks to ponder over, lest the economic needle would keep on swinging between high and lows. Things would certainly have been different, had the housing market had been treated in a rational manner instead of creating panic.

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For a large number of investors in stocks and mutual funds, home ownership offers a significant option of investment that can expand their overall portfolio. Real estate consists primarily of only two positive categories that have gone beyond price rises over time.

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Luckily, the people who are investing have an option of taking part in the real estate market through real estate segmented funds. This particular piece of writing inspects the threats and benefits innate in real estate funds, along with some of the winners and losers in this particular investment horizon.

Real Estate Fund-What the Real Deal?

A real estate fund is thought to be a proficiently administered set of branched out real estate holdings. Majority of the real estate are invested in profit-making, business or rental assets, though they do infrequently experiment in housing investments.

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Past Performance: Lessons to Learn

Generally the Real estate funds go after the conventional economy in conditions of performance; throughout the phase of price hike and financial growth, real estate will regularly offer good returns, while it generally bubble  down in times of recession. The real estate division also goes through era of growth and retrenchment, in the similar manner like all the other divisions of the economy.

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Why should a person invest in a Real Estate Funds?

A person who wants to make small investments should invest in Real estate funds which will permit them to partake in the earnings from significant money-making real estate ventures like business offices, parks and skyscrapers.

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Merits and Demerits of Real Estate Funds

Even though real estate finances are generally growth or revenue oriented, people who are investing can usually anticipate receiving both bonus income and asset gains from the trade of treasured possessions inside the portfolio. Owing to this reason, the investors who are conscious about the taxes may be pleasingly amazed when they obtain their yearly capital gains distributions.

Just like the other division of funds, real estate funds are more prone to be wavering than broader growth supported or income funds. If we talk about the other sectors, people investing can normally anticipate being hit firmly in these particular funds when the market in the real estate falls down.

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What are Real Estate Funds Investment Risks?

There are numerous risks involved in Real estate funds that are natural in this sector of the market. The main risks could be Liquidity threat, market threat, and of course not to forget interest rate risk are the few factors that can sway the gain or loss.

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Sheer Ignorance

Dow has witnessed a sharp pullback from just below 10000 levels and now it’s notching close to 11000. This rally was backed by a series of positive numbers, however, it seems that the trade in stock markets completely ignored the stalling consumer confidence and the fact that 43 million people, one out of seven Americans are coping with poverty.

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Climbing the Wall of Worries

This spike in exuberance for bulls came from the cheers, when NBER, after a long awaited period, finally gave out the official word that the recession ended in mid 2009. So far, we all know what reputation NBER holds in making official announcements regarding start and end of a recession, and no surprise, if we may already be in another recessionary phase.

The real tests for the market are not far off from here as October trade sets in, which is out of favour for the bloodshed it usually brings. May be the bulls are already sensing the fears, but right now the markets are climbing the wall of worry; let’s see how far it goes.

Where the Wealth Lies

However, stocks account for about 15% of total Americans wealth, which yet again saw a considerable fall last quarter and now stands at $53.5 trillion as per recent statements from Federal Reserve. The key driver of American’s wealth are the real estate prices that account to over 30% and the remaining is in Bonds, retirement accounts, CDs, Mutual Funds, and privately held possessions.

Americans’ saw a sharp decline in overall wealth in the recession as it fell from a high of $65 trillion to the bottom at $48 trillion in 2009. The overall recovery has been dismal despite the good pullback in stocks.

Whatever small rise in wealth, was on the back of stock performance, whereas, the real estate prices continue to act as a dampener, and the worst part is that many economists hold a view that a complete recovery may not set in before 2015.

We Won’t Buy

Low on wealth, US consumers will lack confidence to spend freely, which will further put stress on economic activity as it accounts to around 70%. The key is the housing market, consumer spending will pick up only if the consumers see their wealth rebounding. This time it’s completely different from other recessions, where consumer spending accounted for most of the recovery, and that the reason why we may still be looming for a double-dip recession. This one has deeper roots and NBER doesn’t seem to understand it or it’s simply ignoring the facts.

Confidence in Jitters

Consumer spend may loom at an annual rate of 2% throughout this year as the job environment along with wealth creation for Americans remain shaky amid mixed economic activity. Another reason to add up is the savings rate, which is ticking higher, and clearly suggests that the Americans are losing faith in the economy. Icing on the cake, September, consumer confidence is on a wild drop and economists are suggesting a further weakening of housing prices, only to revive in second half of next year.

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Reality of Real Economy

Future of the US Economy

Is the Bear up Again, How will Autumn Pan Out?

Reaping over the past will not straighten up things for future; rather, we should be examining the key culprits behind the market crash. As we know, amass Toxic Assets held by banks dried up lending activity when real estate prices took a sharp plunge and losses for banks kept piling up. So, our key concern should be on the health of financials and real estate, as they can yet again trigger a bear market.

Current state of Banking and Real Estate

Banks are currently enjoying the financial aid provided by the government, and they have well invested this money in different Treasuries. The only concern is that they are still not lending to businesses and mostly relying upon low yields from investments in Treasuries. On the other hand, revenues from securities trading have shrunken heavily as the stocks are still trading in the blues.  Whatsoever, these are the two main sources of income for banks at present, which are helping them recover from the losses made in toxic real estate market. Banking concerns on the real estate front are not getting any respite as foreclosures are continuing due to persistent unemployment and refinancing constraints for homeowners. So, in case of banks, we can expect them to be the key participant in next bear phase if there is no breather from falling housing prices.

Federal Reserve has taken proactive stance in stabilizing the real estate crises, which is clearly visible from their low interest rate regime. But the real estate situation is no better than worse as homeowners with bad credit are finding it hard to refinance due to stringent lending norms. Anyhow, the June data reflected some change in sentiment, which even the markets rejoiced with a rally. But, the incongruity between actual performance of real estate sector and the stock price action clearly states that market is accumulating froth. So, at this point, if the equities start correcting again real estate stocks will be ideal shorting plays for bears. From the fundamental standpoint, this sector might take a severe knock if the Fed is not able to keep the rates low for long.

Autumn sets in with the Bear Knocking at the Door

Based on past track records, we can say that market activity remains calm in August, as key participants are busy holidaying. But who knows, what’s cooking up for this autumn, as investors and traders are nervy on the possibilities of a renewed recession and economic downside fears due to soaring deflation risk. Better still, August can turn out to be a flat month, but real tests await markets in October, as volatility is generally up in the so called ‘Devil’s Month’.

Its time to position ourselves for a potential correction, however, the markets can always surprise as they usually shrug-off sentiments and predictions. Still, it’s better to anticipate a fall as then blue chip stocks will be available much cheaper than their current value. Those who are not comfortable sitting on cash all this time can certainly switch over to defensive, as such stocks yield consistent dividends, and on the brink of deflation these will be most preferred investments.

The home market of the United States has suffered greatly in the past few years. Foreclosures are at epic levels, and banks have been falling like flies as more and more of their homeowners lose their homes. It has been a serious situation and many investors are hoping that the bad times are in the past and better times for homeowners and banks are ahead.

The home market in 2008 and 2009 was nothing short of awful. It was a horrible time to be investing in real estate and it was a horrible time to be a homeowner. Millions of people were losing their homes and the purchase of homes was down to its lowest levels in decades. Many investors were worried about just how low the real estate market was going to go, but it appears that things may be improving in 2010 and that is good news to many homeowners and real estate investors.

Home Sales are Improving

Pending home sales in the United States went up by just over eight percent in February, which is making some investors think that the housing market is improving thanks to the tax credit created by the government to help spur home buying. According to the National Association of Realtors, pending home sales rose from a 90.2 reading in January to 97.6 in February. Real estate agents feel that this is the sign of a second surge in home sales coming thanks to the home-buyer tax credit. The reading indicator is based on contracts that have been signed to purchase homes, but is not a representation of the finalization of the purchases. This usually comes two months after signing the contract.

Pending home sales in February 2010 were 17.3 percent higher than they were in 2009, when the index for February was only 83.2.

The tax credit offered by the government is aimed to revive the housing sector by giving credits to individuals buying their first homes, but this tax credit only lasts until April 30.

The increase in home sales was a big surprise to experts who were expecting a slip due to the big winter storms that had hit the country during that month.

Will the upward trend continue?

Will this continue? Well, the real test will be to see if things continue to improve in May, after the tax credit has expired. If home sales continue to increase and foreclosures go down, then there is a good chance that the housing market will keep recovering. Many experts in the United States hope the housing market recovers like Canada’s which has seen huge growth for a year now, which has helped to lift up the entire economy of the northern neighbor to the United States.

The housing market continues to improve and many experts hope that this stays the case for months to come. With the tax credit and increases in February, only time will tell if things improve for the American housing market.

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