Money magazine carried an interesting survey this month. It asked people what they thought was the best asset class to invest in right now. There were seven different asset groups to choose from. Real estate came in first, with 25% saying it was the best investment. Stocks came in last; only 12% thought stocks were a good investment.
The media are a great indicator of what NOT to do when it comes to contrarian investing. In the late '90s, every show on CNBC was touting tech stocks. And we all know what happened. I see the same thing happening with real estate.
The media are feeding the real estate frenzy. Almost every day, I read an article about real estate investing. And I thought the Money magazine poll was interesting because it shows a great divide in sentiment between real estate and stocks.
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People like real estate. They hate stocks. It's obvious.
The contrarian in me wants to do the opposite. Go short on real estate and long on stocks. Let me tell you why.
The herd is always one step behind. It is always shortsighted. And the herd is definitely shortsighted about real estate. IYR, the iShares Dow Jones U.S. Real Estate index, has been going up over the last month. And the Russell 2000 small-cap index has been falling. Both lines diverged in early April. This is an interesting play for the small-cap investor.
Would you rather buy the overinflated, overpriced real estate index or the sunken small-cap index? Would you rather pile into real estate with the rest of the crowd or buy small caps when everyone else thinks it's a bad idea?
The answer is simple if you look at some statistics. The real estate market was driven by low interest rates. And rates have been steadily rising 0.25% every quarter. Soon, housing is not going to be affordable anymore. In fact, housing starts have posted their biggest monthly decline in 14 years! And analysts expect a 70% drop in real estate prices in red-hot markets like California.
Yet 25% of the public thinks real estate is a good investment!
The much-hated small-cap sector, on the other hand, seems to be a better investment. Simply because the herd doesn't like it. And when the crowd is not looking is the best time to buy.
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