tag: realestatetag: investing

The ever-rising housing market has always been a source of frustration for me as a non-house-owner. Even back when I was doing the salary thing, the people who had a house seemed so much better off- even though we both had the same salary, I couldn't save up enough towards a down-payment to match the appreciation they were seeing.

Living in NYC and LA no doubt contributed to these feelings, but I've heard the same things from young houseless professionals (aside: is "houseless" in the right adjective order there?) in other locales. Nonetheless, I started saving up for the inevitable housing purchase, and chose to put that money in a REIT.

Anyway, with all the (probably exaggerated) doom and gloom about American housing, I thought I'd take a look at two issues that matter to me as a wannabe homeowner:

1. If things are getting bad for homeowners, when would be the best time to take advantage as a non-owner and
2. Is my current (somewhat dormant) "house fund" going to be wiped out by either real or investor-imagined housing problems since it's in the sector?

When to take advantage

If there's going to be a massive foreclosure spike that sends house prices in a freefall, when will it be?

The best data around comes from Credit Suisse, by way of Kedrosky.

That graph (which has January 2007 as its origin) has peaks at the end of this year and then again at the end of 2010. Given my current cash-flow status, I'm guessing I should be aiming for 2010. These figures are when rates will reset for mortgages, so I imagine there foreclosures will lag behind. However, given that smart owners will sell once they see the new rates, 2010/11 should be a good time to target having a nice liquid down-payment ready.

Is my REIT a bad idea

I haven't been contributing to it recently, but I have a small chunk of change as a Roth IRA in the TIAA-CREF REIT. It's performance certainly looks as slow and steady as ever, although with a smaller slope than when I opened it in 2003.

A Roth doesn't really make sense any more (no 401k these days), but it's not a terrible vehicle for a house because of the principle-home-purchasing exception. I'm okay continuing with that.

So if I expect lots of foreclosures, does this (or any) REIT look to benefit or be hurt? Time to hit up the prospectus (yes, I should've read it more closely four years ago).

The REIT is tring to make money from rental income (good) and appreciation of real estate owned (bad). To a "limited extent" it can also invest in mortgage loans (uh oh).

The distribution as of the beginning of the year was 80% of the assets in 121 properites and 12 joint ventures (sounds good), and what seems to be about 1% in mortgage related holdings (promising). It looks like generally all the mortgages we hold are on income-producing properties, that makes me feel pretty safe.

And here's a thought- as people get foreclosed, they'll have to move into apartments, which presumably the REIT owns some of.

By far the most interesting pages are 22-24 of the Prospectus, where they list the properties held. $7.3B in office properties (including the IDX Tower here in Seattle- I should stop by for an inspection), $1.9B in industrial, $1.2B in commercial, and $1.9B in residential. I forget how that compares to a balanced SimCity approach, but there's a good concept for a nerd-focused REIT.

Walmart is the #1 industrial tenant, but pretty much tied with a bunch of others. Yahoo and Microsoft are both top five office tenants.

Conclusions

Basically, I have no idea. But curiosity is fun and important in investing, even when it's only peanuts. I'm going to stand pat, and maybe calculate how much I would theoretically want to contribute monthly for three years to have a reasonable downpayment, given the REIT's historical rates of return.

And as I said before, I do think people are overreacting, and there's no cataclysmic foreclosure wave coming. Which is good, despite my selfish joking about affordability.

Now this blog post was certainly a deviation from my norm, eh?

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