Transcripts

"Of Mutual Interest," -John Waggoner, Mutual Fund Columnist at "U.S.A. Today"

SUSIE GHARIB: In tonight's "Of Mutual Interest," we look at the impact of the housing downturn on the REIT market and what it could mean to your portfolio. Here's John Waggoner, mutual fund columnist at "U.S.A. Today."

JOHN WAGGONER, MUTUAL FUND COLUMNIST, USA TODAY: If you've tried to sell your home recently, your offers were probably delivered by pallbearer. Matters are not quite as dire in the commercial real estate market yet, but mutual funds that specialize in office buildings, apartments and shopping malls have seen their lofty returns crumble. Should you get out of your real estate fund now?

The answer is no, with several important qualifiers. Real estate funds invest primarily in real estate investment trusts, which in turn, invest in commercial real estate. REITs as they are called, have several attractive properties. REITS pass virtually all of their income on to investors, which means they pay high dividends -- an average 4.6 percent now. And, because the commercial real estate market doesn't march in lockstep with stocks, adding a real estate fund can be a good diversification play.

REIT returns cracked last month, falling an average 9 percent, even after including reinvested dividends. Real estate mutual funds fell a similar amount. Investors worried that a slowing economy could mean a slowdown in employment and hence a lower demand for office space. But the real problem is that REITs have risen too far, too fast, and were due for a significant correction. The average real estate fund, after all, has gained an average 21 percent a year for the past three years, compared with 12 percent a year for the Standard & Poor's 500 stock index.

Trees don't grow to the sky and neither do apartment buildings. What could go wrong? A spike in interest rates or the unemployment rate would be a good reason to reconsider real estate funds. For now, however, real estate funds are still a good way to build wealth, albeit at a slower pace than before. I'm John Waggoner.