Sectors in Demand in Hard Times
by Clint Kennedy
Basic Economics Today

Hard times mean that Americans are experiencing hardship.  The unemployment rate is high, around 9.2%.  People are without jobs or may be in jobs that don’t adequately pay for any positive gain in assets.  Many people are in negative equity in their homes and will be for years.

How can this dismal news contribute to a sound investment plan?  Basically speaking, what economic sectors will succeed now?

Apartments

The long struggle in the real estate market will lead to increased apartment rentals, at least in the short run.  Investing in rental properties or companies that manage rental properties would be smart planning.  Let’s take a look at some U.S. property rental corporations and their stock value histories.  It must be noted that the S&P/Case –Schiller Home Price Indices historical data shows that in 2006 U.S. national home prices began to decrease (S&P Indices, 2011).  In 2010 national homes prices started to decrease again.  The real estate bubble was a factor that contributed to the recent deep recession that began in December of 2007.

The Apartment Investment and Management Company (AIMCO) (ticker symbol AIV) share prices hit bottom at the end of 2008 at $6 a share and gradually increased in value to about $25 in June 2011 (NASDAQ, 2011).  AIMCO shows losses for net incomes in 2010 and 2011, but the loss has been decreasing.

Equity Residential (ticker symbol EQR) share prices hit bottom around the beginning of 2009 at about $17 and gradually increased to $60 in June 2011 (NASDAQ, 2011).  Equity Residential had positive net incomes for 2008, 9 and 10.

Centerline Holding Company (ticker symbol CLNH) share prices were about $21 at end of 2006, then plummeted to a penny stock by the end of 2008 and has never recovered (NASDAQ, 2011).

Some of the largest US apartment owner corporations are privately owned, but offer investment funds for investment, such as Boston Capital.

“The apartment industry made a surprising recovery in 2010 from the aforementioned recession (2007, 8 recession).  Like all commercial real estate sectors, apartments have traditionally been a lagging industry, and the rather modest improvement in the economy had suggested a more muted pick up in apartment demand.  Instead, the popularity of renting increased to its highest level since 1998” (NMHC, 2011).  Across the country rental demand and pricing increased.

Overall, data supports the basic economic concept that when one good becomes too costly then the next best alternative with lower pricing will have increased demand.  After housing owners lost tremendous equity, and or defaulted on their loans, they opted for apartment rentals.  Another way of saying this economically is the opportunity cost of owning a house was very high.  Owning an apartment was a more sound investment.   Investment in home ownership is a much smarter plan for the long run.  After about a year or two it will be best to switch over to real estate ownership investments.

Movies

In the Great Depression people went to the movies.  Movies get our mind off of how bad things are.  Netflix (ticker symbol NFLX) had a share price at about $20 at the end of 2008.  It has gradually risen to $260 in June 2011.

Alcohol


When people get depressed they drink more.  Diageo PLC (ticker symbol DEO) had a share price of about $42 at the end of 2008.  It has gradually risen to $83 in June 2011.


References


NASDAQ (2011, June). AIV Intraday Chart, NASDAQ. Retrieved June 10, 2011 from

        http://www.nasdaq.com/asp/SummaryQuote.asp?symbol=AIV&selected=AIV


NMCH (2011). FULL NMCHC 50: Rankings, Analysis, Articles and More, National Multi

        Housing Council. Retrieved June 11, 2007 from

        http://www.nmhc.org/Content/ServeFile.cfm?FileID=8710            


S&P Indices (2011, May). National Home Prices Hit New Low in 2011 Q1 According to 
        
        the S&P/Case-Schiller Home Price Indices, Standard and Poor’s. Retrieved June 
       
        10, 2011 from http://www.standardandpoors.com/indices/main/en/us 


Copyright ©, June 2011