When I was in the US recently I met a professional real estate investor “everybody wants to get into real estate” he began. “It makes sense. Prices are back at a reasonable level. You can just look at the long-term trend, over the last 40 years. Prices today are below the trendline, after coming down about 30%.”

“So, you can get a fair deal again. And you can be pretty sure your money won’t disappear. What else can you buy? Some want to buy real estate because they’re afraid of inflation. Others because they’re afraid of deflation. Some think the stockmarket is going to crash. Others think the bond market is ready for a beating. Even gold investors are scared.

“The logic is simple enough. The economy has too much debt. It goes into a spell of debt-deleveraging. The authorities print money because they can’t do anything else. So, the price of gold goes up. Sounds simple. But what we’re seeing is that it doesn’t work like that. At least, not quite that easily. The economy turns a little Japanese. So bonds go up. The dollar goes up. Other investments get killed. And as long as bonds and the dollar are going up, as long as we’re on the trail to Tokyo, gold doesn’t really have much oomph behind it either. It could go down to $1,500, or even $1,000 and stay there for years.

“I don’t want to get locked into US bonds, because Ben Bernanke could turn on those helicopters at any minute and as for stocks?

“So what about real estate. It’s priced at a fair value – statistically. Unlike gold, you can get income from it. Everybody is looking for rental properties with a decent income stream. And you can get such good financing. We are seeing mortgage rates the lowest in generations. Of course, they’re for single-family, owner-occupied housing. But people are mortgaging their own houses at under 4%. The money is practically free because the real inflation rate has got to be over 3%. Plus, sometime between now and when the loan finally gets paid off, inflation rates are bound to go up and then not only will they be getting the loan interest-free, they’ll also be able to pay it off with much cheaper money.

“So, the smart money is taking this cheap money and buying rental units. If they can get a net yield of 10%, they’re way ahead of the game. And that’s do-able. But there are two problems. First, it’s hard to find good deals. It looks good on paper. But profits can get eaten up in maintenance and there are many people competing for the genuinely good deals.

“The second problem goes back to that trend-line. Real estate went way over the fair value in the last decade. Now, it’s back to fair value. But if it can go way over trend, it can also go way under trend. The guys who are buying real estate now, they’re going to be disappointed if prices just keep falling.

“As a comparative prices in Japan haven’t gone back to trend. They have just kept falling. They have ended up 80% below the peak. They actually bent the trend-line down. Now the population of Japan is going down. They don’t get married. They don’t have children. So they don’t need starter houses, or family houses, or any kind of houses. Just apartments for old people. That’s not how to get higher real- estate prices.

“America, isn’t in that position. But a lot of the demand at the starter-house level was coming from Hispanic immigrants. And the Hispanics aren’t coming the way they used to. In fact, they’re now going home. Not only that, but more grown up children are moving back in with parents and more parents moving in with children. This will mean less demand for separate housing units.

“So, we’ll probably first have some some over-shoot to the low side of the long-term trend-line which could take prices down another 20 plus%. Then we might have a permanent bend in the trend-line, as the number of new households actually begins to go down. You think the middle class is having trouble now – just wait until their main asset is down over 50% from peak value.

“I do think real estate is one of the safest places for money long-term. But just don’t expect to make a lot of profit quickly, and don’t expect it to be easy to find a good property. Remember, the profit is made when you buy. It’s hard to buy well. I spend time looking; but good deals are hard to find and all that glistens is not gold, even gold!”

NOTE: This is written in a personal capacity and reflects the view of the author. It does not necessarily reflect the view of LWM Consultants. The post has been checked and approved to ensure that it is both accurate and not misleading. However, this is a blog and the reader should accept that by its very nature many of the points are subjective and opinions of the author. This is not a recommendation to buy any product or service including any share or fund mentioned. Individuals wishing to buy any product or service as a result of this blog must seek advice or carry out their own research before making any decision, the author will not be held liable for decisions made as a result of this blog (particularly where no advice has been sought). Investors should also note that past performance is not a guide to future performance and investments can fall as well as rise.