Look Out, Bubble Ahead (Thanks, Fed!): Real Estate Expert

At REITWorld, Ken Rosen points to strong fundamentals but advises investors to watch out for shifts in interest rates

“The economy has more positive to it than Washington, D.C., knows. It is not stagnating, given the private-sector job growth, strong auto sales” and other factors, said economist Ken Rosen, speaking at REITWorld 2013 in San Francisco on Wednesday.

Still, the head of the Berkeley, Calif.-based Rosen Consulting Group says, there’s likely another asset bubble in the works.

“My big worry over next few years is that we will we create another credit and asset bubble, because rates are too low. Money’s too easy. It’s a substantial risk,” Rosen said, predicting that it would emerge more clearly by 2016 or 2017.

“The Fed doesn’t worry about asset inflation and just deals with it after the fact,” he said.

Federal Reserve chairwoman nominee Janet Yellen, set to go before Congress on Thursday, is not expected to change the Fed’s tapering policies, Rosen notes. “She will testify and show she is a bit hawkish … because she has to be with those in Congress,” he said.

“I guess the first taper is in March, and then within a year, there’s no more quantitative easing. It’s not working,” said the consultant, who got his Ph. D. in economics from MIT and then taught at Princeton, as well as the University of California, Berkeley.

“I think Yellen will be forced to raise rates sooner than she thinks,” Rosen added.

He also pointed to factors supporting strength in the real-estate sector, such as very robust rental-rate growth in places like San Francisco, where there’s been a jump in new jobs tied to technology, especially social media, and in Houston and North Dakota, where employment in energy has been booming.

Overall, the number of jobs lost during the recent recession, about 8.8 million, should all be back by mid-2014. About 7.8 million have been recovered so far.  

“The stock market is already ahead of our year-end forecast,” said Rosen. It should stay there for a while as long as rates are low. “But when it turns, it’s going to hurt.”

Investment Outlook

Overall, real estate “is still cheap,” the expert says. “Real estate is being driven by the push for yield and modest growth. It looks pretty attractive versus the 10-year Treasury. It may not be the best, but it’s good for yield. People are desperate for yield, and REITs are a place to find it.”

When Fed policy makes a shift, stocks could weaken—a good time to buy quality real estate plays, including those in data centers, senior housing, health care properties and apartments.

But watch out. REITs appear to be “very sensitive to the unwinding of interest rates and the bond bubble we have,” he says, pointing to a dip in the group in late spring and early summer. While shifts in real-estate valuations can help investors, Rosen explains, changes to interest rates may offset returns over time as rates rise.

(This point is hotly contested by host of REITWorld, the National Association of Real Estate Investment Trusts. Its analysis shows that REIT returns have shown gains in 12 of 16 recent periods of rising interest rates.)

In other areas, the economist and consultant also suggests shorting the 10-year Treasury and high-end residential real estate in China. Looking around the world, “China is the biggest real estate bubble in the world,” Rosen said. “It will burst and will have consequences,” he said during his presentation on Wednesday.

In addition, Rosen notes that the expanding income divide is a serious issue, pointing to different employment rates by educated versus less-educated workers and higher spending levels for those earning $50,000 a year or more.

“It is a dual economy today, and there are long-term issues due to educational inequality,” the consultant said. The government and the Fed “cannot change this and help the bottom group with monetary policy, which is raising asset values and helping top-income earners.”

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Check out 3 Major Portfolio Risks and How Liquid Alts Can Help on ThinkAdvisor.

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