The US property prices retain an upbeat outlook as they continue to rise at an average of more than 11% since last year. Last month, analysts polled by Reuters said that the current upswing in housing prices is likely to continue throughout the year with two-thirds of the 34 analysts expressing an optimistic view of the market.

This creates an exciting opportunity for property market investors looking to profit from US real estate. However, while this may be exciting to investors, people looking to buy houses for ownership may not be as eager.

                                                                Image Source: Unsplash

Time to bet on the housing boom?

Data shows the US 30-year mortgage rate rose to an average of 3.3% this year. Last week, the rate fell to 3.08% after the housing bull-run decided to take a breather. It is expected to rise higher to 3.6% next year before reaching pre-covid highs in 2023. The problem is that the current mortgage rates are too high given the prevailing Funds Rate of just 0.25%. It could get higher if the Federal Reserve decided to hike rates in the foreseeable future. 

The good news is that no hike is expected until at least the next presidential election. This could be an opportunity to bet the US housing market’s bull-run. While prices may seem high, they are only likely to go higher unless a housing market crash occurs. 

One of the factors that investors may want to consider when investing in the US property market is that states have different property tax laws. So, don’t invest too much to overburden your tax liability. Some people have lost their properties for failing to foresee such situations. It has led to the rise of property tax loan firms that try to bail out those who get stuck paying their property taxes.

What investment vehicles to use?

The first that comes to mind of many investors, is buying shares of real estate investment trusts (REITs). However, it is also good to consider the specific categories of the investment trusts.

For instance, we have residential-focused REITs, Commercial Office REITs, Retail REITs, Diversified, and Mortgage REITs. The challenge of betting on REITs focused on commercial office, residential, or retail is that they come with added risks unique to the specific industries.

For instance, commercial office and retail REITs were adversely affected by the covid-19 pandemic. Lockdowns meant that shopping malls and corporate offices had to be temporarily locked. 

Diversified REITs are exposed to several risk factors. This can be both an advantage and a disadvantage. They are well diversified, which means the potential downside is lower if one of the properties they invest in is affected by market risk. It also means that potential earnings are lower.

On the other hand, Mortgage REITs provide financing for income real estate investments. They purchase mortgage-backed securities and earn interest income from their investments. Therefore, it makes sense to invest in Mortgage REITs when interest rates are low like they are now. 

Most Mortgage REITs are trading at attractive valuation multiples. For instance, AGNC investment Corp (Nasdaq:AGNC) which is up nearly 30% over the last 12 months trades at a price-earnings ratio of just 3.19. This is primarily due to the low-interest rates. 

However, interest rates are expected to rise in the foreseeable future. Analysts have speculated that it could take 3 years before the federal reserve raises rates again. But things could change soon depending on the economic recovery and the success in combating the pandemic.

The Federal Reserve has already hinted at a potential tapering later this year. This could signal a strengthening US economy,which could pave the way for more tapering measures like hiking rates. Now could be the time to bet on the US housing market before prices rise further.