Should you diversify your portfolio with real estate stocks?

Finding a good deal in the current real estate market can be quite difficult. Prices are maxed out in most markets and sellers are bombarded with offers, many of which are beyond demand.

The science of investing tells us that buying near the top of a market is never a good strategy. The whole idea of ​​“buy low, sell high” is not confusing, but it is often overlooked.

In this real estate market, many active and future real estate investors are wondering whether it makes sense to buy a property on these terms or not – and ultimately they have to decide for themselves. However, as investors we need to weigh all of our options and make sure our portfolios are diversified.

That brings me to the topic of the day: housing stocks.

The condition of the property

Let’s talk briefly about what the real estate market is like right now.

Prices are still rising, demand is still exceptionally high, materials are still expensive despite the cost of wood finally falling, potential buyers are being pushed out of the market every day, inflation is rising, and the looming possibility that the Fed will remove its training wheels the economy have crated all real estate.

Also, eviction moratoriums have ravaged landlords in the past year and a half, and litigation is sure to increase as the Supreme Court has just ruled the eviction ban unconstitutional.

So while the ultimate “safe bet” may be an investment in real estate, at times like this we have reason to look for more liquidity. Fortunately, getting into the exchange is as easy as opening a brokerage account and getting started.

But why housing stocks?

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Housing stocks have developed well

For one thing, if we look at Forbes residential property, which consists of building materials companies, hardware stores, and home improvement stores, we can see that the index has grown 30 percent since the start of the year.

That’s a whopping 11 percent faster than the S&P 500, which happened to hit a record high last week.

Companies like Home Depot (HD) have seen a huge surge in stock prices since the pandemic began. On March 23rd, 2020, just before the pandemic, Home Depot’s shares sold at about $ 251 per share. Today they sell for just over $ 325.

The reason? Home improvement and DIY projects have increased. Homeowners became tied to their homes during the quarantine and found a slew of problems and improvements. As material costs skyrocketed, accepting bids from contractors became much more expensive, leading to more DIY projects.

And the real estate boom doesn’t end at Home Depot or Lowe. Construction companies like Lennar Homes (LEN) have accelerated their share growth and are up 42 percent since the start of the year.

It seems contradicting itself. We are facing a serious housing shortage and housing starts are still low. The good news is that housing starts actually rose, albeit slightly, in July. This is positive after two months of decline.

The bigger question is, how can construction companies still estimate while the rise in construction costs is causing construction contracts to stall? Well, many point to the fact that inventory is well below where it should be – meaning that the deficit of homes allows builders to get a constant stream of new contracts regardless of the pace. This of course leads to sustainable business.

Investors have to decide whether their share prices are inflated by pure speculation or by intrinsic value. As wood prices have dropped to pre-pandemic levels and the general growth of the stock market continues, there are many reasons to believe that home-related stocks will continue to appreciate.

Strong diversification is strong defense

There is currently great uncertainty in the economy and the world. The delta variant of COVID-19 is widespread. Questions about the Fed’s monetary policy are debatable – despite assurances that asset purchases will continue throughout the year to ensure the economic recovery stays on track.

At times like these, it is best to have a portfolio of many asset classes that can withstand the downward pressure of an economy. Real estate is always considered a safe bet, but getting a new property means you are likely to pay more than you should.

On the contrary, although stock investing can involve greater risk, it is important to remember the liquidity of stocks and the ability of selected securities to outperform inflation. (Speaking of inflation, the White House just announced last week that inflation would rise 4.8 percent in the fourth quarter, up from a much more conservative forecast of 2 percent in May. Protecting your dollar is extremely important for investors.)

Increasing purchasing power by riding the wave of stock prices can be a great way to prepare for a time when home prices are falling and demand begins to settle.

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