As talk of a double dip in pricing for the national housing market increases, it is clear the United States economy may be moving towards the perfect storm. While this perfect storm does not involve hurricanes and fishing boats, the convergence of wages decreasing, cost of goods increasing, and the housing sector continuing to falter is equally as frightening. On top of this, the federal, state and many local governments can not pay their bills due to a lack of required tax revenue. Today’s job report is not helping them.
Hence, the perfect storm may deliver a potentially devastating blow to an already fragile economy. So, how do you protect yourself in case this happens? Here are a few ideas:
1) Invest in commodities: Inflation is defined as an increase in the prices of goods and services over a period of time. Commodities such as rice, wheat and corn, for example will increase in price with inflation. In addition to the possibility of inflation, I witnessed first hand in Nebraska that corn growth is behind schedule. If the corn industry does not produce the required yields, there may be a severe shortage in supply, hence a big increase in pricing! While you should consult your financial advisor, here are a few options to research: iPath Dow Jones AIG Commodity Index Trust(DJP), iShares S&P GSCI Index Trust (GSG) and PowerShares DB Commodity Index Tracking Fund (DBC).
2) Short bank stocks: Banks have an incredible amount of exposure to real estate. The Markit ABX AAA 2007-1 index, a tradable derivative based on sub-prime loans, has fallen about 20 percent in just over three months, reflecting weakness in housing and the very poor recovery rates banks are able to get from foreclosed houses. Pending home sales, released last week by the National Association of Realtors, fell by 27 percent in April compared to the year before, an 11.6 percent fall in the month. Additionally, house prices have hit a new post-bubble low, down almost a third from their 2006 peak, according to data released on Tuesday by S&P Case-Shiller. Again, your financial advisor should be able to consult you on shorting stocks, as it can be complicated.
3) Invest in real estate instruments: As a passive investor (which means you do nothing except provide equity), real estate instruments such as REIT’s (Real Estate Investment Trusts) and RELP’s (Real Estate Limited Partnerships) can provide a strong hedge against inflation. REITS are openly traded on the major market exchanges and there are approximately 170 currently registered with the SEC. You can buy them and sell them whenever you desire. It offers the flexibility of cashing out when you need and provides dividends, but does not tell you typically which properties you have invested in.
RELP’s (Real Estate Limited Partnerships) are a more direct approach to investing in real estate without requiring your time or expertise. You get to choose the exact property you wish to invest in based on the fundamentals presented to you by the General Partner. Typically, you must be an Accredited Investor to participate, which provides an advantage over non-accredited investors to access these opportunities. If you would like to learn more, please let me know.
While there may be a fair amount of uncertainly in the world today, one certainty is your ability to make informed decisions about your financial future. In the near future, RRC will be starting a series of webinars to help to educate our audience on these options. Please stay tuned for more information.
Darren Nakos, CCIM
Resort Realty Capital
111 Main Street
Frisco, CO 80443-0630
THIS IS NOT A SOLICITATION FOR INVESTMENT – THIS INQUIRY IS TO FIND OUT IF YOU ARE INTERESTED IN RECEIVING ADDITIONAL INFORMATION. NEITHER RESORT REALTY CAPITAL, LLC, IT’S AFFILIATES AND REPRESENTATIVES MAKE ANY REPRESENTATION REGARDING THE RISKS OF INVESTING IN COMMERCIAL REAL ESTATE. YOU SHOULD CONTACT YOUR OWN PROFESSIONALS TO MAKE THE DETERMINATION AND ASSESS THE RISK OF INVESTING. AS WITH ANY INVESTMENTS, THERE ARE INHERENT RISKS AND NO GUARANTIES OF RETURNS. PLEASE CONSULT WITH YOUR OWN PROFESSIONALS IN DETERMINING THE RISKS ASSOCIATED WITH INVESTING IN COMMERCIAL REAL ESTATE.