Real estate is an important component of the U.S. and global economies. For many Americans, homeownership doubles as a first investment. Beyond a primary residence, investors also can buy into the commercial real-estate market: Office buildings, multifamily housing, hospitals, parking lots, storage facilities, retail properties, call centers, distribution hubs, hotels and restaurants form a sector with its own economic ups and downs.
In 2016, the S&P 500 recognized real estate as its own sector, separating it from financial services where it had been buried for years—a move some view as a portent of more real-estate investment to come and that others view with indifference. Currently, real estate accounts for less than 5% of the S&P 500 by market cap.
How much do you know about real estate—and real-estate investing? Let’s start with a few basics (but we assure you, they will get harder).
1. How do investors participate in the real-estate sector?
A. Mutual funds and ETFs
C. As direct owners/landlords
D. All of the above
ANSWER: D. Many investors inadvertently own real estate. Broad-themed mutual funds typically allocate a portion of their holdings to real estate. They own it directly, too, sometimes in the form of an exchange-traded fund. You can buy stock in home builders or REITs. You also can buy investment properties for income, and in some cases you can carry these properties within an IRA. Some argue that owning a primary home makes the average investor “overweight” in real estate, so portfolio allocations to real estate need not comprise a large percentage of holdings.
A. Real-estate investment trust
B. Real-estate investment tax
C. Real-estate insurance tariff
D. Real-estate investor trade
ANSWER: A. Real-estate investment trusts are investment vehicles that contain securitized portfolios of commercial properties such as office buildings, apartment buildings, retail sites, hotels, storage facilities, parking garages, data centers, even cannabis farms. You can buy shares (typically called units) in a REIT, or invest in REITs indirectly since REIT units are often found within mutual-fund portfolios or inside target-date funds.
3. True or false: Real estate is a countercyclical sector.
ANSWER: It depends. Real estate’s fortunes usually rise in a bullish economy, since indicators such as high employment and a strong regional economy can push up demand and prices for housing, office space, storage, retail and other categories of real estate. But some financial advisers and fund managers consider real estate “countercyclical” since it can zig when the rest of the economy zags. For example, even in a slow economy, consumers still need housing (they may opt to rent an apartment from a REIT, rather than buy a new home) and will continue to shop at retail outlets, pay for parking garages and storage facilities, etc.
4. Which commercial real-estate subsector is least prosperous now?
A. Multifamily housing
ANSWER: D. Retail real estate ranks last among six commercial categories both in terms of its investment and development prospects, according to a joint report on the 2018 commercial real-estate market from PricewaterhouseCoopers (PwC) and the Urban Land Institute. Headwinds in the retail category stem from department-store obsolescence, changes in apparel spending, consumer demographics and the impact of e-commerce and other technology on shopping experiences.
Now, some history questions:
5. What were typical residential mortgage terms before the creation of the Federal Housing Administration (FHA) and the Federal National Mortage Association (Fannie Mae) in the 1930s?
A. 3.5% down with a 30-year payoff
B. 20% down with a 20-year or 30-year payoff period
C. 50% down with a 10-year payoff
D. 0% down, interest-only loans with a 30-year payoff period
ANSWER: C. Before the creation of the FHA and Fannie Mae, it was hard for the average American to come up with a 50% down payment and then pay off the remaining 50% of a home’s value in only a decade; at that time, the homeownership rate was below 49% (versus the current rate of 63.9%, according to U.S. Census data). When the FHA and Fannie Mae were created, insurance against defaults became available to borrowers and banks loosened loan terms to 20% down with a longer payoff. ADDED, per your request:In the ensuing decades, borrowers could make much lower down payments—as little as 0% or 3.5%.
6. How did real estate contribute to the most recent financial crisis and related recession?
A. Lenders relaxed standards and underwrote loans that wouldn’t fly today
B. Banks knowingly and unknowingly sold mortgage securities containing unsound assets, and ratings firms failed to accurately rate real-estate debt sold to the secondary market
C. Investors speculated on housing and homeowners
D. All of the above
ANSWER: D. All of the above. You can read all about it in the Financial Crisis Inquiry Commission’s 2011 report. For a more fun look at what happened, watch the movie “The Big Short.”
7. During the real-estate bubble, which economist was known as “Dr. Doom”?
A. Robert Shiller, author of “Irrational Exuberance” and co-developer of the Case-Shiller Home Price Index
B. Nouriel Roubini, NYU professor, formerly an economist advising the White House Council of Economic Advisers
C. Karl Case, the late professor/researcher who co-developed the Case-Shiller Home Price Index
D. Ben Bernanke, former Fed chairman, now a Brookings Institution economist
ANSWER: B. Nouriel Roubini, a global macroeconomist, boasts the title “Dr. Doom” for his prognostications about the 2008 real-estate and credit-market meltdowns. He is predicting more economic drama.
And some market questions:
8. What foreign country’s investors are buying the most U.S. commercial real estate?
ANSWER: B. Canada, according to research from JLL Research and Real Capital Analytics. During the first half of 2017, Canada accounted for 30% of all foreign investment in U.S. commercial real estate, followed closely by China (21%), Singapore (15%) and Germany (7%).
9. What U.S. city has the lowest rate of apartment vacancy?
A. New York
C. San Francisco
ANSWER: A.New York has a 1.9% vacancy rate, tightest in the U.S., followed by Boston (2.6%), San Francisco (2.8%), Los Angeles (2.9%), Seattle (3%) and Washington, D.C. (3.8%), says National Real Estate Investor.
10. Which commercial real-estate approach isn’t recommended in 2018?
A. Take advantage of demand for new housing
B. Bet on property price appreciation
C. Invest in “experiential retail”
D. Senior housing
ANSWER: B. Investors are advised to look at cash flow from income as a source of benefit rather than property-value appreciation, according to the PwC-Urban Land Institute report on commercial real estate. “Rent recoveries have matured in many markets and across property types. Cap rates have been compressed, but are leveling off,” the report says. “Appreciation is likely to be muted even in secondary and tertiary markets. That means focusing on cash flow and asset management in the immediate and midterm future.”