WHY THE END OF THE HOUSING BOOM MAY NOT BE SUCH A BAD THING

Let's be honest with ourselves: Aren't you just a little glad the real-estate boom is over? No more bragging from self-congratulatory owners of property in high-priced areas. No more breathless tales of bidding wars and comparative sales.

Last week's figures for sales of new and existing homes, both showing sharp declines of more than 4%, make it clear that the long-anticipated real-estate downturn has begun. I realize that a significant downturn in any market causes hardship for some. Tales of woe are mounting from the real-estate industry, from home builders and architects, to empty-nesters and retirees hoping to cash out of big homes and move to smaller places.

There is no doubt that the real-estate industry casts a long shadow, which is why some economists and policy makers are fretting about a slumping market's capacity to drag down the whole economy.

But let's look at the bright side, too. The real-estate market during recent years had many unhealthy economic and psychological effects. Soaring prices forced many people, especially young people buying their first homes and starting families, out of many markets. It pushed too many people into dreadful mortgages. It misallocated capital to construction for which there was no fundamental demand.

Market Cooling

Like the tech bubble, the rapid double-digit annual appreciation in real-estate prices couldn't go on forever. It has clearly been cause for pervasive concern at the Federal Reserve, which helped fuel the boom with its superlow short-term rates. Surely Fed Chairman Ben Bernanke and his colleagues are pleased by a cooling of the market. The recent pause or possible end to rate increases seems well-timed to gauge just how cool it's become.

Purging the market of excess speculation will no doubt yield some tales of plunging prices and hardship. But I wouldn't expect an out-and-out collapse, or even anything as severe as the downturn in the early 1990s. As Toll Brothers Chairman Robert Toll said last week, there's no recession, long-term mortgage rates remain low, and there's still demand for housing. This is a pretty healthy environment for housing, even if there are price declines still in store.

What does this turning point mean for investors? It's time to re-think my longstanding aversion to real estate and related investments.

Hard-Hit Stocks

Stocks of home builders like Toll Brothers and Pulte Homes have suffered severe declines; expectations are so low that they seem good values for patient, risk-tolerant investors willing to wait for the market to stabilize. Some mortgage real-estate investment trusts, hard-hit by rising interest rates and fears of an overvalued market, have just begun to tick up. REITs like Annaly Capital Management and Newcastle Investment are both about 20% above their lows for the year. Other REITs, in my view, remain overvalued.

Property itself may also begin to be attractive, either as an investment vehicle or for your own use. In some markets, falling prices for condos compared with rents are beginning to make them attractive to yield-oriented investors. It is a paradox of falling real-estate values that buyers balk at paying far less than they would have in a rising market, simply because they're afraid the value may decline further after they buy. All of a sudden they're market timers, aiming for an elusive bottom.

As usual, and especially for first-time buyers, I don't believe in trying to time the real-estate market. If you like something, it fits your budget, and you plan to be there for an extended period, stop worrying about where prices are headed. Instead, be grateful you weren't buying a year ago.


-- James B. Stewart, a columnist for SmartMoney magazine and SmartMoney.com, writes weekly about his personal investing strategy. Unlike Dow Jones reporters, he may have positions in the stocks he writes about. For his past columns, see: www.smartmoney.com/wsj_common.

-- August 31, 2006

By James B. Stewart

The Wall Street Journal Online