Analyst: 'Home affordability best in decades'

There is mounting evidence that the residential real estate prices are picking up momentum, even though naysayers continue to suggest another sharp drop is just around the corner.

Tuesday's Case-Shiller home price index shows that San Diego has seen prices increase 12.4 percent in the past 12 months, second only to San Francisco among the top 20 metropolitan areas in the country.

So, set aside the real estate bulls and bears that have emotional opinions about where prices may be headed. Instead, what do portfolio managers who run real estate mutual funds think about the current market conditions?

Remember, these people can't just hope prices go up or down, they have to make investing decisions to protect their portfolios both when prices are rising or falling.

Daniel Kelley is the lead real estate analyst and portfolio manager of the Fidelity Select Construction and Housing Portfolio.

"Having just gone through a potentially once-in-a-lifetime down market, there is a bright light. Home affordability is the best in decades. In fact, on average, today's homebuyers have the lowest mortgage payments as a percentage of income in 30 years," wrote Kelley in a recent research report.

He also points out that inventories of homes for sale are at 40-year lows, meaning that homebuilders could be at a point where they could actually begin building homes again. The inventory of new homes for sale plunged last month from 9.6 months to just 7.6 months.

"I think well-capitalized public homebuilder companies are particularly well positioned to benefit from any demand improvement. These companies have had to survive through the worst market of our generation and many of the weaker firms went bankrupt," adds Kelley.

He adds that when sales ultimately pick up, new homeowners will be anxious to make their new abodes more livable, meaning trips to Home Depot and Lowe's.

"As the homebuilding rebound gains traction, companies in the building products group should benefit from improved capacity utilization rates. Homeowners looking to put their homes back on the market are frequenting home improvement retailers to make necessary repairs and updates in order to increase the sale price," said Kelley.

What about the commercial real estate situation? Kelley's colleague at Fidelity, Steve Buller, who manages the Real Estate Investment Portfolio, has a different opinion that most observers.

"While some commentators are calling commercial real estate the next shoe to drop, I don't believe it. In fact, you could argue that we've already seen the worst of the commercial real estate crisis.

Last year, commercial real estate prices had fallen roughly 40 percent from the peak. However, commercial real estate property prices have steadily risen, climbing 20 percent since their trough in May 2009," said Buller.

History says that real estate investment trusts -- and the stocks they own - have a tendency to rise months ahead of any actual turnaround in the markets.

When -- as always happens -- this recession comes to an end, many nonbelievers will find themselves left in the dust as markets move back into growth. The only problem, of course, is no one knows exactly when that will happen.

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