Is It REIT Time Yet ? - You've Got to Be Kidding Me
We'd normally save this post and the embedded links for the weekend but then we try and be selective - that is pick not only interesting stories but ones that are accurate. Or at least make a good point. One of the better financial columnist (Tim Middleton from MSN Money - a goto guy on Mutual Funds and ETFs to be fair) has this column just up today on why REITs may be getting cheap. The last time he made this kind of bet looking backward was recommending the Japanese ETFs last Jan.
Just to be absolutely crystal clear we're not putting this up because we endorse the findings. Instead it perfectly illustrates two major themes we strike here, over and over again, which seem to be escaping most of the discussions about the market outlook.
- You've got to understand the internal character of an industry and its' likely future path.
- You've also got to understand how that industry works in the context of the overall macro-environment.
This column is, IOHO, a perfect example of just the opposite. The CRE dynamics are to follow residetial and the economy. In other words it's likely headed off the same cliff as a lot of different news would tell you.
It's also a perfect example of why the analyst community, with its' emphasis on bottom-up stock analysis ISOLATED from the macro-climate, is wildly over-optimistic about the earnings outlook.
Below you'll find Tim's column excerpted along with an excerpt from a WSJ article telling us how bad it's likely to get. And from Mr. GoTo himself, CalculatedRisk, taking his usual dive on CRE. His post in particular will lead you back to his on-going thread of detailed analysis where his charts make it clear that the CRE market is about to be in serious trouble.
Just to put another nail in the coffin this is a small example to set against our prior to posts on the outlook for the business cycle AND the portfolio of problems that are not being discounted in valuations.
READINGS
Real-estate funds look cheap now The commercial sector is showing signs of strength. Is now the best time to buy in? That's hard to say for sure, but prices for real-estate investment trusts are down by a third. With equity markets foundering, the long-suffering commercial-real-estate sector lately has shown the barest glimmer of strength. That ETF tracks an index of real-estate investment trusts, or REITs, which allow one to invest in property without owning land. They've inspired some hope lately despite the real-estate slump, but is that hope well-founded? And real-estate investment trusts had rocketed ahead so much in recent years that even their current bear market may not have let out all the hot air. Since peaking one year ago and through Feb. 11, the MSCI U.S. REIT Index ($RMZ.X) -- the Vanguard fund's benchmark -- is down 33.8%. But at that peak, it was up 180% since the start of 2000. Now, I have no idea whether we've reached a bottom in real estate. But I do know that when securities are on sale for one-third off, they're a lot more attractive than they were at full price. I'm probably early, but I intend to start adding to my REIT holdings in coming weeks.
A Commercial Real-Estate Bust Investors are hoping the subprime-mortgage debacle will be a bad memory by the year's second half. Instead, they might have another mess to sort out in commercial real estate. If it were a movie, it might be called "Subprime II: Monster in Your Mall." Work on everything from new malls to office parks helped to carry the construction industry as housing crumbled. While residential construction spending was down 20% in December from a year earlier, nonresidential construction was up 20%, according to the Census Bureau. But clouds are forming over the sector. Commercial real estate probably didn't get as overheated as housing in this boom, but tight credit and a slowing economy are squeezing the sector. The Federal Reserve's latest survey of senior loan officers showed 80% of domestic banks tightened lending standards on commercial real-estate loans in the past three months -- the highest level since the question was first asked in 1990.
Recession: CRE and PCE Since residential investment is in a severe slump, I've been arguing that the two keys to the economy were investment in commercial real estate (CRE) and consumer spending (personal consumption expenditures or PCE). In addition, one of the keys to PCE was MEW (mortgage equity withdrawal). Sorry for all the acronyms! Yesterday the data from the Bureau of Economic Analysis (BEA) showed that MEW was still strong in Q4, providing support for consumer spending. However, a large portion of MEW was from preexisting home equity lines of credit (HELOCs), and there has been a significant development with several banks now suspending HELOCs or severely limiting withdrawals. I'd argue the evidence suggests some homeowners have been using their rainy day funds already. Now, for many, that source of funds is being shut down. I believe we will now see a further decline in MEW, and a corresponding slump in consumer spending. Still, if both PCE and CRE slump in Q1 as I expect, the recession will definitely be here (I think it started in December).