Your Investment: Smart money looks at US housing

Some very shrewd and big investors are starting to make large bets on a real-estate recovery.

By AARON KATSMAN
March 21, 2012 23:51
3 minute read.
Housing foreclosure

Housing foreclosure 370. (photo credit: Thinkstock/Imagebank)

Trying to cherry-pick a market low is virtually impossible. A mistake investors often do is to try to time the market and guess when an asset will bottom out. But it’s very rare when an investor can pick the exact market low.

As I write this column on the 15th anniversary of my mother’s passing, I am reminded of a saying she always used to say: “A na’ar is a navi,” loosely translated as prophecy was given to fools. Translate that into investing, and you understand that since we do not have the ability to see the future, trying to exactly predict it is a losing proposition.

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That being said, intelligent investors can analyze current trends and come to certain conclusions that would make the purchase of an asset prudent regardless of whether it may drop another 10 percent to 20%, because in the long run they feel that the appreciation will be sizable. Case in point is US real estate.

Most investors relying on conventional wisdom would think that an investment in US real estate is insane. In a recent interview with Barry Ritholz, CEO of Fusion IQ, Yahoo reported: “Ritholtz gives a couple of reasons why his opinion does not fit in with the consensus view that housing may be headed for a recovery. The most telling is the fact that many Americans are still without jobs and those who do have jobs have experienced slowing wages.

Both economic realities make it very difficult for working men and women to earn money for basic necessities let alone save up enough money to put toward a down payment on a home.”

Perception is not reality

But many think Ritholtz is wrong. While the perception is that the US economy is still mired in a recession, recent economic data is somewhat encouraging. Economists are not doing cartwheels in celebration over the return of robust economic growth, but they are encouraged by increases in consumer confidence, retail sales, auto sales and employment numbers. Based on this, some very shrewd and big investors are starting to make large bets on a real-estate recovery.

According to Yahoo Finance: “Zuckerman cited SAC Capital, Blackstone and Caxton Associates as among the funds making big bets on homebuilders, like Beazer Homes (BZH) and Pulte (PHM). Generally speaking, homebuilder stocks have been on a tear, with the S&P Homebuilders Index (XHB) up nearly 70% since its October low, while the iShares Dow Jones US Home Construction ETF (ITB) is up more than 75%. The bullish cash for housing rests largely on record levels of affordability, thanks to a combination of low rates and a steep decline in prices since the highs of 2006.”

Pay rent to a hedge fund?

The aforementioned funds are mostly buying up retail property or large residential complexes. Where the realestate story gets very interesting is that some hedge funds are getting in on the act. But instead of buying office buildings or skyscrapers, they are buying up singlefamily homes. Just imagine having to pay your rent every month to a hedge fund!

The Las Vegas Sun recently ran a fascinating article about the state of real estate in the resort city: “Hedge funds could be the next big player in the Las Vegas real-estate market. And I’m not talking about apartment complexes or commercial property. I’m talking single-family homes. In other words, in a year or two, if you’re renting a single-family home like an increasing number of valley residents, your landlord could be a hedge fund or some other ‘alternative investment vehicle,’ such as a private-equity group, pension fund or university endowment.”

The article continues: “Waypoint, an Oakland, California- based company, has bought 1,000 homes as rental properties in other markets. Brien’s group GI Partners has raised $400 million from an Ivy League endowment and a large institutional investor to buy many more. With leverage, the fund could grow to $1 billion. This seems likely to happen here in Las Vegas because it’s already happening in other markets. The Wall Street Journal reported in August that McKinley Capital Partners has bought more than 300 foreclosed single-family homes in the Bay Area and has a partnership with Och-Ziff Capital Management Group LLC, a New York hedge fund, to buy at least 500 more.”

Whether looking to enhance your income or for a capital gain, at these depressed levels, following the smart money in real estate may be worth taking a look at.

[email protected]

Aaron Katsman is a licensed financial adviser in Israel and the United States who helps people with US investment accounts.


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