Industry analysts are beginning to voice concerns that the US real estate market might be about to experience a significant downturn over the coming months.
For instance, the supply of housing stock appears elevated compared to previous years, while the number of properties enjoying multiple offers continues to decrease.
Borrowing costs are also higher for potential buyers, with mortgage lenders raising interest rates in line with growing inflation.
However, the S&P Case-Shiller 10-City Index has recorded year-on-year increases in house price valuations for every month so far in 2022, suggesting that it’s not all doom-and-gloom for the market just yet. Indeed, the time that homes remain on sale has also declined to 35 days – a figure that’s 26 days shorter than the typical waiting period at the start of 2020.
That said, several indicators still suggest the market may be cooling off right now. House prices increased 19.7% across the country during May, although this represented a fall from the 20.6% reported in April. Moreover, there was record growth in the national inventory of active listings in July, with a 30.7% increase from the same time last year.
While it’s still too early to say if the real estate market is in recession, it seems there will be at least a degree of uncertainty for quite some time.
Of course, predicting how the overall situation will unfold is also tricky. The picture isn’t uniform across the United States, with some cities such as Miami and Dallas having witnessed much steeper price rises than others.
But if we take the pessimistic view and assume the housing sector’s about to undergo a downward correction pretty soon, is there any way for investors to profit from a forthcoming real estate bear market?
Is Property An Effective Hedge Against Inflation?
Markets don’t operate in a vacuum. If house prices are subject to more and more volatility, it’s clear that some other cluster of economic factors is driving the phenomenon forward.
But with today’s fiscal climate increasingly characterized by the Federal Reserve’s failing inflationary control policy, is it wise to enter the real estate market at this particular juncture?
Perhaps it is. In fact, a study conducted by Stanford University confirmed that residential property acts as a safe-haven asset during historically high inflationary environments.
And while this might seem paradoxical, there are simple reasons why it can function as an inflation-resistant security.
For instance, the higher cost of capital involved in buying, building and maintaining real estate means that property values tend to keep up with inflation over the long term. Furthermore, rent usually increases along with interest rates and inflation, meaning that you can always count on your investment property to provide a steady income well into the future.
All in all, property is one of the few asset classes that can remain profitable even amid a fairly vicious bear market.
So, if real estate really can help bolster your portfolio, what’s the best way to go about implementing it today?
Direct Real Estate Investing
One of the more basic ways to cash in on the property market is to purchase a stake in one or more properties on your own or as part of a consortium.
Indeed, there are many upsides involved with direct real estate investing. These include the potential to generate substantial cash flows, which, with proper planning and management, can generate a solid return on your initial investment.
Another benefit is the prospect of price appreciation. Over time, real estate properties usually go up in value, enabling you to sell at a later date and make a substantially improved profit.
Moreover, as a direct real estate investor, you have more control over your decisions than you would have had as a passive investor. You can filter properties that match your preference for location and building type, and you can also determine rental prices and the exact tenants you choose to occupy your property. This allows you to build a portfolio that precisely reflects your strategy and investment goals.
All of these factors make direct real estate investing an attractive option for many investors.
However, there are also some pitfalls too.
For example, managing your own portfolio takes energy and resources, and organizing the financing of acquisitions can be time-consuming too. On top of that, real estate is an illiquid asset, meaning it’s not always easy to sell if you need to release capital in an emergency situation.
Real Estate Investment Trusts (REITs)
If you would rather let someone else take care of your property interests, you might prefer to invest in a real estate investment trust instead.
REITs are a perfect option for investors who don’t want to micromanage every aspect of their portfolio. They are also suitable for those who wish to benefit from exposure to a diverse range of properties, especially those spread across multiple sectors and in different regions and jurisdictions.
Furthermore, REITs provide a stable and highly reliable source of income, and are required by law to distribute at least 90% of their taxable profits to shareholders. If the underlying value of the trust’s property increases, then there is the added bonus of capital appreciation too. And because REITs are highly liquid publicly-traded securities, it’s easy to cash out your investment if you ever wish to do so.
However, REITs can be sensitive to changes in interest rates, and have performed poorly in slowing economies where central banks have implemented contractionary monetary policies.
Can You Make Money In A Real Estate Bear Market?
While the real estate market appears to be slowing down, you can still profit from the property sector after all.
In fact, property is the perfect asset class to ride out difficult economic times, especially those marked by high inflation and rising interest rates.
Real estate investment trusts and direct property investing are great ways to capitalize on this exciting industry, with opportunities to profit both at home and abroad.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.