Intermarket Analysis: Profiting from Global Market Relationships

CHAPTER 14

Diversifying with Real Estate

LOCATION IS EVERYTHING

They say that the three key words in real estate are “location, location, location.” Since the big bear market in stocks began in 2000, real estate has been a good place for investors to locate their money. This has been true both in terms of home ownership and any stock related to homebuilding and real estate. This is not necessarily the norm, however. Real estate has usually been viewed as an inflation hedge. Real estate prices were usually tied to the cycle of inflation. The value of homes and real estate rose during periods of high inflation and fell during periods of low inflation. The price of a home peaked along with the inflationary bubble around 1980. Home prices then followed the inflation rate, dipping into the 1990s. More recently, however, their paths have diverged. Over the last five years, home prices have jumped 39 percent. Home values jumped 7.5 percent each year in 2001 and 2002 as the inflation rate dropped to 2 percent. Part of the reason for the aberrant behavior of real estate during this down cycle in the economy is the fact that interest rates have acted differently and have fallen to the lowest levels since the 1950s.

THIS CYCLE HAS BEEN DIFFERENT

There is no question that the latest downturn in the business cycle has been different from anything seen since in the post-World War II era. Deflationary tendencies that started five years ago have changed many of the traditional intermarket ...