The Safest way to Invest in the Real Estate Bounce

More millionaires have been made in real estate than any other investment in the United States. All one had to do was start buying single family homes, rent them out to cover the mortgage payment, and then price appreciation would take care of the rest. It was an easy formula to riches. Millions upon millions actively took advantage of the housing bull market to build their nest egg.

Still, millions more benefited from the boom, in a passive fashion, as their individual family home price skyrocketed into the stratosphere. In fact, from 1963 to 2007, the average home price exploded from less than $50,000 to more than $300,000. This represents more than a 600% return. I know a few hedge fund guys who would sell their grandmother for this type of performance.

Add in the leverage and tax benefits and you had what appeared to be a no-risk path to wealth. These soaring home prices combined with easy credit created a new class of hyper-consumers who bought everything and anything with their new found wealth. This buying drove the economy to dizzying heights in the first seven years of the new millennium.

Next, the impossible happened: The housing bubble burst in 2007. In retrospect, it was easy to see coming, however, only a few economic pundits warned of the bust. Many of the newfound real estate elite were revealed to be emperors with no clothes, as their heavily-leveraged mini-empires collapsed under their own weight. Multiple real estate investors were trapped, unable to sell in an illiquid market.

This rapid decrease in prices led to the banking crisis, the government bailouts and too-big-to-fail legislation.  Now, finally, signs of the real estate market bottom are starting to surface. The relevant economic numbers have started to tick higher, indicating the worse may be over. Even the most pessimistic economists are agreeing that the bottom should be evident by mid-2013.

#-ad_banner-#Regardless of what economists tell us, many investors remain scared of real estate. Let’s face it: real estate remains a relatively illiquid investment at this time. If you have ever tried to sell a home in a down market, then you know exactly what I mean. How can one benefit from the likely bounce in real estate prices without getting stuck?

Well, the answer is by buying professionally-managed Real Estate Investment Trusts, or REITs for short. These tools will enable you to catch the coming bounce in real estate without the liquidity risk of buying physical properties.  Let’s take a closer look at one that recently caught my interest…

The number one real estate investment on my radar is the Schwab US REIT ETF (Nasdaq: SCHH). This exchange-traded fund (ETF) is built upon the Dow Jones U.S. Select REIT Index by investing in stocks included in the index. The fund has returned about 16% during the past year already.

What I like most about this ETF is its diversification within the real estate sector. Its top holdings include the strong performing REITs such as Public Storage (NYSE: PSA), Simon Property Group (NYSE: SPG) and Equity Residential (NYSE: EQR). It’s produced a steady dividend yield of about 2.6% during the past two years and has been in a steady uptrend this year. Perhaps, most interestingly, is that Charles Schwab Investment Advisory just added 262,400 shares to its holdings. I like seeing this type of insider interest.

Technically, the 50-day simple moving average has been acting as solid support since December, 2011. Shares have slipped from their high of $31 to about $30 during the past few trading sessions.

Risks to Consider: Despite the strong performance of the Schwab REIT ETF, its performance remains tied to the uncertain real estate market. Although my research has indicated that the real estate bottom is in or very close, no one really knows what the future holds. Be certain to use stops and position size correctly when investing.

Action to Take–> This ETF has set up perfectly for a buying opportunity. As long as price stays above the 50-day simple moving average at $29.42, buying the current consolidation is the way to go. I view this ETF as a long term play, but only above the 50 day simple moving average. Right now, buying the pullback/consolidation appears prudent. However, should shares slip below the 50 day simple moving average, buying breakouts above this level makes sense. REIT’s, in general, show lesser correlation with the overall stock market than other ETF’s. This makes REIT’s the perfect way to diversify your portfolio.