Ways to Play Real Estate's Bust to Boom

Many families in America are looking to buy a house now that the real estate market is improving and banks are lending again. While it is exciting to ultimately buy your dream home, most people are learning that the real estate market is very difficult and frustrating at this time. Although homeowners are excited to see the values of their homes increase, buying a new house is more challenging than ever. Many houses on the market are getting multiple offers at higher prices, all cash bids or are vastly overpriced.

Although it is frustrating, truth be told, these circumstances are hardly surprising given the current real estate environment, which has become overheated in some areas of the country. Among the converging factors that have caused a mini housing bubble are the following:

  • A largely dormant home building industry, which is only now beginning to hasten the construction of new developments after struggling to survive in the wake of the financial crisis; This has limited the current supply of new homes.
  • Speculative buyers that gobbled up foreclosures at bargain basement prices at the depths of the market crash, many of whom remain hesitant to sell with housing prices showing signs of taking off.

  • Record low interest rates, which have made homeownership a very compelling proposition to a broad section of the American public.

  • A drop in mortgage defaults and a parallel upswing in luxury home sales.

  • The positive change in the economy and perception in the housing market from 'wait and see' to 'get in now.'

The confluence of these factors have combined to constrain inventory and spark an increase in home prices, creating an ideal market for sellers, whose homes are fetching prices that would have been unthinkable only 12 to 18 months ago.

For typical home buyers it's a different story. With housing prices rising ahead of incomes in many areas, it might be worth waiting a year or two for a market correction or at least until supply and demand reach more of an equilibrium stage. By then, the Federal Reserve may finally return interest rates to near pre-crisis levels, while inventories are more likely to align with demand. As a result, housing prices should level off and become relatively more affordable.

With that said, there is an opportunity for investors to take advantage of increasingly bullish real estate conditions without purchasing real estate properties directly.

By seeking out companies who support home construction and making targeted plays on specialized real estate investment trusts (REITs) or real estate related assets, you can ride the current real estate surge while it lasts without overpaying for a new house. In particular, the following investments present intriguing opportunities for investors looking to take advantage of the potential boom in real estate:

  1. MGM Resorts International (MGM: NYSE) - It's no secret that luxury gaming destinations offer upside potential in any economic rebound scenario, but we like MGM Resorts International in particular because real estate in Las Vegas has been severely depressed and projects like City Center have finally become profitable. Add to these considerations the fact that the hotel/casino business has been very strong and companies such as MGM look very attractive.

  2. Weyerhaeuser (WY: NYSE) - Another interesting direction that investors can take is investing in companies that are supplying the critical supplies for new home construction. Among these companies, Weyerhaeuser is a clear leader in every respect. In particular, the publicly-traded timber company supplies wood to the home building industry and it also has a home building division. They are poised to profit from the rebuilding efforts underway up and down the New Jersey coast, where Hurricane Sandy made landfall last year.

  3. The Sherwin-Williams Company (SHW: NYSE) - Sherwin Williams is an additional strong example of upside potential with companies that supply materialsfor new home construction or renovations and repair. As one of the premier paint supply companies in the country, Sherwin Williams will likely benefit from post-Sandy reconstruction trends, the general upswing in new home construction as well as renovations related to real estate transactions. They are also expanding in Latin America, a great real estate growth market.

  4. Health Care Properties (HCP: NYSE) - Assisted living facilities will be in ever increasing demand as the population continues to age, leading to the continued expansion of this industry. Clearly, homes and facilities for older people will continue to intensify in importance to our society over time. It's not a sexy business but we all will become elderly sooner or later, and for the large baby boomer segment of our population, that time is just around the corner. HCP offers a robust upside opportunity on this combined real estate and demographic trend opportunity, with a solid dividend for investors.

  5. Prologis (PLD: NYSE) - Industrial real estate is also a strong bet for the current real estate surge, providing upside both in terms of real estate assets and in terms of increased corporate spending from an improving economy. Prologis is an owner of warehouses and offers logistics services for major companies. As companies grow and expand Prologis helps them store and manage inventory. It is also a play on a recovering world economy over the next few years as they are a global company.

If we have learned nothing else in the last five years, it is that real estate cycles are difficult to predict and very cyclical. The environment will eventually get better for prospective home buyers, as builders create more supply and speculative buyers inevitably begin to unleash much of their closely held inventory on to the market. However, it's anyone's guess when that might happen.

In the meantime, by playing things smart and focusing on investment opportunities that both support the real estate market, and track improved economic conditions, investors can potentially realize a robust upside over both the medium to long term horizon.

Ross Gerber is CEO and president of Santa Monica, Calif-based Gerber Kawasaki(www.gerberkawasaki.com), an independent investment advisory and wealth management firm with approximately $175 million in assets under advisement. Gerber Kawasaki clients and employees may own positions in various companies mentioned in the article, but readers shouldn't buy anything without doing their own research.