I own a couple of REITs in my portfolio, which involve mostly commercial real estate. I have enjoyed nice dividend returns as well as equity appreciation. However, there is much talk in the popular media about a real estate bubble. I personally believe there is something to this, as Bill Fleckenstein points out, so many Americans are using their homes as ATM machines, and the run up in prices is not unlike what we saw in the months leading up to the bursting of the tech bubble. I am by no means an expert in commercial real estate, so my question to the forum is: if there is a bubble burst in real estate, how will this affect prices of commercial properties, apartment buildings, hotels, etc? I'm sure there is a strong connection between the prices of commercial and residential real estate, but is it strong enough to dump my REIT shares before the proverbial bursting of the bubble.
Like I tell everybody else who asks a similar question regarding buying and selling anything, there are just too many variables too be able to give you a good answer -- especially as it applies to your personal situation.
Here’s the problem in a nutshell as Bill Fleckenstein and others see it. Since the stock market bubble burst in 2000 there has been a flood of money going into residential real estate as the Fed kept the printing presses running at full speed. So one bubble begat another bubble as money came out of stocks and into real estate.
Also, the savings rate in this country is almost nonexistent. So, for many people, their entire net worth is tied up in their home. And to qualify to purchase their home (since they wanted the most expensive home that they could qualify for), many people took out variable rate mortgages. Also, you’re right, when they’ve wanted to raise cash -- and since they have no savings -- people have been tapping into the equity in their home. So they’re highly leveraged and a significant uptick in interest rates could cause a great number of foreclosures, which puts more supply on the market along with less demand. And that combination always equals lower prices.
Of course, if there is a real estate bubble it’s not going to affect all areas of the country in the same way and to the same extent. The residential real estate market in California may be much more vulnerable than in Iowa. And then there’s the question of how this might apply to commercial real estate and, more specifically, to your REIT’s. I’m not an expert on commercial real estate either. But I do know that any market can go down. And I can’t remember a time in my experience when the residential market was weak and the commercial market wasn’t. There may have been a time like that but I just don’t remember when it was.
So I personally wouldn’t be crazy about REIT’s right now. But as a matter of full disclosure I thought the same thing a year ago. And, obviously, the REIT sector has done just fine since then. But the bottom line is I just don’t like the risk/reward ratio.
By the way, what REIT’s do you own? Some of them are a lot more leveraged than others.