Options Investing – Giving Real Estate A Try?

The real estate market in the U.S. has experienced significant price declines in the last five years, dropping as much as 40% in some areas of the country. The hardest hit markets are California, Nevada and Florida. These markets experienced some of the fasted increases in real estate prices starting in 2004; hence it is no surprise that these markets have been hit the hardest. Prices are now back down to their 1991 levels, so why aren’t people rushing to purchase properties that a few years ago, at much higher prices, were thought to be great deals?

A combination of factors is inhibiting the bottoming out in the real estate market and the return of investors. Three of these factors are: extremely tight credit, the unemployment rate and the continuing decline in real estate prices. Why would a consumer purchase real estate if they could potentially buy the same property in a month or two for 5 or 10% less? With rates declining, some investors are also hoping that they can get a lower rate, while others are waiting for the federal government to pump additional stimulus into the market, with their proposal to, on a short-term basis, buy-down all new 30-year mortgages and drive mortgage rates down to about 4.5%. With the ever-increasing unemployment rate, it should come as no surprise that the deteriorating economic situation is not abating. Prior to the peak in the economic crises; there was approximately 7 months of real estate inventory on the market. With all of the lay offs, the inventory has risen to 9 months as at January 2009.

Some other factors that are affecting the market are, the appreciation in the dollar, which makes it more difficult for foreign investors to purchase prime real estate in places like New York. The negative effect of the economy on baby boomers, in addition to the fact that a number of them are retiring and downsizing to reduce their expenses is not boding well for the economy. We can no longer look to baby boomers to rescue the economy and the real estate market from the current slump.

Most experts expect the real estate market to recover in the fourth quarter of 2009. If this prediction holds true, one way to safely and slowly get back into the real estate market is to invest in Real Estate Investment Trusts (REIT). REITS invest in real estate and trade like stocks; they also provide high yields and receive favorable tax considerations.

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Avalon Bay Communities (AVB) is one of the largest owners of rental properties on the east and west coast, Avalon Bay is a well capitalized and extremely well managed company. AvalonBay develops, acquires, refurbishes, leases, and manages apartment complexes. AvalonBay focuses on upscale areas where restrictive municipal laws curb excessive development; hence these areas have experience increases in rental rates. Some of Avalon’s key markets include Boston and San Jose, California.

Boston Properties (BXP) a large owner of Class A offices in New York, Washington, Boston and San Francisco. Some of their properties include the Prudential Tower in Boston, the General Motors Building in New York, Embarcadero Center in San Francisco and Metropolitan Square in Washington D.C.

Vornado Realty Trust (VNO) is among the top holdings of virtually every REIT Exchange Traded Fund ETF. Vornado is one of the largest owners and managers of real estate in the United States with properties located in the New York and Washington, DC metro areas.

If you must buy real estate, you should stick with areas that have weathered the price declines better than most of the country and that are poised to enjoy a recovery when it begins, these areas include Washington DC, Texas and North Carolina.

Investors tempted to invest in real estate, but a little uneasy about doing it, might consider protecting their investments with stock options. A put option can provide “stock insurance“, so if a stock investing position drops in price, a stock trading investor has some protection. Additionally, stock trading investors might consider the covered call investing strategy, which can provide for a monthly stream of income.

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[tags] real estate, California, Nevada, Florida, New York, Real Estate Investment Trusts, REIT, Exchange Traded Fund, ETF, AVB, Avalonbay Comm, BXP, Boston Properties Inc., VNO, Vornado Realty [/tags]