Reversion to the mean

 

It’s one of the most predictable trends in the investing world- “reversion to the mean.” Remember the dot-com boom? Those stocks took off, right?

Naturally, tech stocks soon fell back to earth. But people forget that the NASDAQ did eventually recover and grow again.

Markets are like that. And we believe real estate is no different.

Sales of existing homes are up 10.4% from a year ago. We’ve had five back-to-back months of increasing sales on an annualized basis. New home sales are hot, too — up more than 25% from a year ago.

Image from http://www.economist.com/node/11465476

Yes, there are a lot of distressed properties. Yes, the economy is weak.

But you know what? Low lending rates and increasing confidence are digging us out. The market is trying to get back to a mean.

At CoreStates, we believe that value is found in the conviction to act during a bear market. It’s okay to be early, as long as you’re right.

Consider a few of the newest numbers: Home prices nationwide took off in July, up 3.8 percent. That’s the biggest increase year-over-year since 2006.

Importantly, the trend is building. The July jump was the fifth straight increase, according to CoreLogic, which closely follows national housing data.

When you take out so-called “distressed” sales — those are the foreclosures and the short sales — home prices are up even more, 4.3% higher than a year ago. CoreLogic sees these kinds of numbers extending into August.

Meanwhile, the vacancy rate — that is, how many houses are empty and available, as measured by U.S. Postal Service data — has fallen in 90 out of 100 metro areas, according to housing tracker Trulia.

Falling vacancies is a reflection of improving job markets and weak housing starts, that is, low supply.

In effect, people are beginning to move to places where they can get jobs. Yet battle-scarred homebuilders are unlikely to keep up. Believe it or not, we have the ingredients of a housing shortage ahead in some of our key national real estate markets.

At CoreStates, our view on real estate is now positive. History will show, we believe, that the final bottoming process has already begun. We strongly suggest that investors consider the opportunity banging on the front door.

Why property? Because it’s a great inflation hedge — like any good hard asset — and because the time is now.