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February 13, 2008


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Your last sentence: You mean until the Fed is done LOWERING interest rates?

I'm not putting my money where my mouth is on this one, but it seems to make sense to me that as the number of foreclosures increases, rental real estate should become a better investment.

Not sure why the writer talks about residential housing so much when discussing REITs. The two really don't have much in common. When looking at REITs, I recommend comparing REIT yields to the 10 year. When the REITs yield 2% or more about the 10 year REITs are a good play (traditionally). When below, like 2007, they tend to perform poorly. Right now, they are still richly valued as the writer points out. But, REITs are a good diversifier to a portfolio, and no one can really time the market so holding a small percentage at all times is wise.

Just another sloppy article from Marrotta.

"Real estate may seem attractive with today's choppy U.S. markets, but we suggest you keep your money invested elsewhere until the Fed is done raising interest rates."

This does not reassure me about taking Marrotta's advice.

And the previous poster is right about REITs and residential real estate.

"Many mortgages grew to exceed 80% of the home's value. Then the Federal Reserve started to raise rates.

Homeowners with adjustable-rate mortgages saw their monthly payments jump. Many found it impossible to stay in their homes. The rate of late payments and foreclosures increased, resulting in some of the lenders themselves declaring bankruptcy. Rising interest rates caused housing prices to fall. "

More sloppy avoidance of facts that don't fit the story. The fed STOPPED raising rates in July of 2005. Monthly home foreclosures were at under 50,000 at that point -- low by any measure. From July 2005 to July 2006, there was only a mild increase in foreclosures. From July 2006 to August 2007, foreclosures more than tripled!!

Incidentally, mortgage rates are only indirectly influenced by the Fed, and with the "flight to quality" buying of treasuries in the market today, as well as the fed's rate cuts, the "reset risk" associated with mortgage forclosure rates is almost zero. Hybrid ARM resets will barely increase most people's payments at all, at this point. This is relevant because the number of resets up to this point has been extremely small relative to 2008 and 2009 concentrations of reset dates -- another crucial fact that doesn't make it into the article because it clouds the picture a bit.

"The beta of REITs versus the S&P 500 is currently about 1.68, which means REITs are about 1.68 times more volatile than the movements in the S&P 500. "

That is NOT what beta means, any any first year MBA student could probably tell you that. Standard deviations of returns and other similar statistics measure volatility. Beta is a measure of how much "market risk" is in a particular investment, and ignores any idiosyncratic risk. A high beta stock can be WAY less volatile than a low beta stock, in certain circumstances. For example, if you bought stock in a gold mining company, your investment might have a very low or even negative beta, but it would NOT have very low or negative volatility -- it would have a ton of volatitilty related to gold prices, just not necessarily correllated to the rest of the market. So it is not accurate to say that REITs are 1.68 times more volatile than the index.

Anyway, I continue to be suprised at what Marotta puts out there. It is certainly better than alot of commission-based advisors' shills, but is it really that hard to avoid having several inaccuracies and misleading statements in a 1 page article?

You really love Marotta, don't you, Jake?

Let me say this. If you have an asset allocation and you are one of the 5-10% that stick to your portfolio and REIT is a part of it, then continue to buy. It is as simple as that.

I just bought VGSIX the other day to maintain my proper allocation.

I continue to buy VGSLX (REIT) through DCA, because its part of my Asset Allocation plan.

Even so, its worth noting that with builders slowing down, foreclosures rising and qualifying for new loans getting tougher existing properties that are leased by REITS should see an increase in demand

oooooooooooh. Admiral status.


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