Why Real Estate Might Be The Asset Class For 2016

After a few years of healthy gains we have seen the median existing home price slip roughly 6-7% during the 2nd half of 2015:



Notice the stair-step pattern of price appreciation since 2011. Are we ready for the next leg higher during the 1st half of 2016?

Meanwhile, household formation is accelerating at a blistering pace:



And throw in the fact that legendary investor Howard Marks just pointed out in a recent interview that real estate is one of the most attractive asset classes currently:

“So what’s your strategy in this kind of market?
We are living in a low return world caused by the central banks pulling down the risk-free rate to zero. And yet, even though the returns are low, the risks are substantial. That’s why at Oaktree our mantra for the past four and half years has been “move forward but with caution.” The outlook today is not so bad and prices are not so high that they demand complete caution and defensiveness. But at the same time prices are not so low and the outlook is not so good that we should be aggressive. So our strategy is not maximum defensiveness, not aggressive. It’s somewhere in between, but with a significant emphasis on caution. And that means you have to select your investments carefully.

What would be an example for such an investment?
Real estate: There are no real estate mutual funds and there are no real estate ETFs. That means the retail money can’t make its way to real estate as readily as to other asset classes and drive up prices as quickly. That’s why I think real estate is cheaper. Now, I’m not talking about core real estate: A class buildings in a A class city like New York. I’m talking about B and C class buildings in non-prime cities. But such investments require local and specialized expertise. Amateurs shouldn’t try it.”

Real estate looks like an attractive place to be invested for 2016 after the stock market has tripled in the last 6 years and the bond market is beginning to look weary after a 30+ year bull market. And as Marks stated, amateurs shouldn’t try it without having significant local and specialized expertise.


Co-authored with Maggie Sadowska of Mega Lux Homes