SUSIE GHARIB: As we continue our series "Reviving the Economy: Real Estate," tonight's commentator has some thoughts on investing in the REIT market. He's John Waggoner, mutual fund columnist at "U.S.A. Today."
JOHN WAGGONER, MUTUAL FUND COLUMNIST, USA TODAY: Real estate funds have had the paint peeled from them the past 12 months, but this isn't the time to go bargain hunting. The funds could get demolished in the coming year. Real estate funds invest in real estate investment trusts or REITs and REITs, in turn, buy and sell real estate, passing nearly all the income on to shareholders. The average REIT yields 9.6 percent, which certainly looks attractive compared to the 10-year Treasury note yield of about 2.9 percent. But the high yields on REITs come with some big dangers. First, REITs invest in commercial real estate, apartment buildings, office complexes, malls, even storage facilities. Although some economists see signs that house prices are bottoming, the commercial real estate market could be tottering on the brink of big declines. Just this month, General Growth Properties, the second largest mall operator, filed for Chapter 11 bankruptcy protection. Secondly, as commercial properties become vacant, they often have to slash rent to get new tenants. That means lower income payouts for REITs and lower yields, too. Currently, REIT yields are at their highest since 1990, about the time of the last big real estate meltdown. And prices have fallen substantially, almost 20 percent in February alone. But even though prices have been slashed, they could well have further to fall. If you're tempted, don't throw all of your money at once into real estate. Tiptoe back in by adding a little bit to a real estate fund every month. Otherwise, it might be a good time to let the buyers' market in REITs run its course. And if you own a home, haven't you had enough of real estate already? I'm John Waggoner.
JOHN WAGGONER, MUTUAL FUND COLUMNIST, USA TODAY: Real estate funds have had the paint peeled from them the past 12 months, but this isn't the time to go bargain hunting. The funds could get demolished in the coming year. Real estate funds invest in real estate investment trusts or REITs and REITs, in turn, buy and sell real estate, passing nearly all the income on to shareholders. The average REIT yields 9.6 percent, which certainly looks attractive compared to the 10-year Treasury note yield of about 2.9 percent. But the high yields on REITs come with some big dangers. First, REITs invest in commercial real estate, apartment buildings, office complexes, malls, even storage facilities. Although some economists see signs that house prices are bottoming, the commercial real estate market could be tottering on the brink of big declines. Just this month, General Growth Properties, the second largest mall operator, filed for Chapter 11 bankruptcy protection. Secondly, as commercial properties become vacant, they often have to slash rent to get new tenants. That means lower income payouts for REITs and lower yields, too. Currently, REIT yields are at their highest since 1990, about the time of the last big real estate meltdown. And prices have fallen substantially, almost 20 percent in February alone. But even though prices have been slashed, they could well have further to fall. If you're tempted, don't throw all of your money at once into real estate. Tiptoe back in by adding a little bit to a real estate fund every month. Otherwise, it might be a good time to let the buyers' market in REITs run its course. And if you own a home, haven't you had enough of real estate already? I'm John Waggoner.
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