While the Dow Jones Industrial Average is reaching record highs, there are signs of investor concern.  Perhaps the most ominous are the high short floats on the exchange traded funds for the Dow Jones Industrial Average (NYSE: DIA) and the Standard & Poor’s 500 Index (NYSE: SPY).  While a short float of 5% is considered to be troubling, the short float for the DIA is 13.06% and for the SPY it is 31.55%.

  Clearly investors are looking for a decline in the equity markets.

Confirming this negative outlook is the recent rise of gold and real estate.  Gold just broke through the psychologically important $1600.00 an ounce barrier after being battered since last year.  Over the last six months, the exchange traded fund for gold, SPDR Gold Shares (NYSE: GLD), is down almost 10%.  But the last month has witnessed a rally for the price and the volume of the GLD.

Housing has been surging for over a year.  The exchange traded fund for housing, SPDR Home Builders (NYSE: XHB), is up for the last week, month, quarter and year of market action.  For 2013, the XHB has soared by 12.72%.

What the recent rise in gold and housing securities reveals is the long term appeal of investing in real estate itself and private mortgages, and other notes.  The short floats for the SPY and the DIA evince that smart money is looking for the stock market to fall, and looking for any reason.  The recent declines in global equity markets due to the turmoil in Cyprus, an island nation of 1.1 million whose gross domestic product is less than 1%, certainly shows just how tenuous the recent gains are for stocks.

This is not the case for real estate and gold.  Housing prices in the United States continue to rise.  Even though consumer confidence is down in the most recent tally, prices for new homes in American rose from January to February.  A recent front page article in The Wall Street Journal by Nick Timiraos, “Investors Pile into Real Estate, This Time as Landlords,” detailed how major institutional investors are buying up thousands of homes across the country as rental properties.

When real estate is strong, the stock market is weak.  The housing boom in the United States in the early 2000s was at the same time as the equity markets falling due to the tech bubble bursting.  There are a variety of factors for why this transpires.  To revitalize the economy, interest rates will be lowered, which makes housing more attractive.  When stocks are falling in price, investors naturally turn to other assets, such as housing and private mortgages that finance real estate investing.

The private mortgage investment is particularly appealing.  According to Jerry Cohen, President of EquityBuild, a premier private mortgage investment firm, “There are two methods for getting started in private mortgages: Mortgage Pools and Direct Lending.  Mortgage pools are like the mutual funds of private mortgages. Each investor's money is pooled with the other investors participating in the pool and the money is used for private lending.

Cohen, who was just awarded the prestigious “Moving America Forward” honor, furthered that, “Direct lending is typically reserved for seasoned real estate professionals due to the level of expertise that is needed to identify undervalued properties...”

Another asset that becomes more appealing when stocks fall is gold.  The Yellow Metal is a traditional safe haven asset for when economic times are bleak.  The chart below shows how the GLD has fallen as the SPY has surged since the beginning of the new year.  Even more illuminating is how the GLD rose in November during the period when the SPY declined due to concerns about the impact of The Fiscal Cliff on the American economy.  Investors fled stocks for hard assets such as gold.
moneycentral.msn.com
(graph source moneycentral.msn.com)

The ultimate hard asset, however, has proven to be investments in real estate itself or the mortgages financing the properties.  Even during The Great Recession, the smart money in real estate was picking up the best units or financing others to be in position for the inevitable recovery in both the United States and global housing markets.  As Timiraos’ article begins:

Jeff Pintar had buyer's remorse as he purchased 12 foreclosed homes in five Southern California counties on a single day. His regret: that he didn't buy more homes a year earlier.
"Things have turned around faster than anyone anticipated," said Mr. Pintar, who first began buying properties here four years ago and now owns or manages 1,700 homes, which he rents out for between $1,000 and $3,800 a month. Here in Orange County, nearly every home listed for less than $400,000 "is being pursued by institutional investor capital," he said.

There will most likely be much more buyer’s remorse in the future for those who ignore the warning signs for the stock market and overlook gold and real estate properties or mortgages.  While The Yellow Metal has its appeal, it cannot generate income like rental real estate or holding the note on a property.

by, Jonathan Yates: EquityBuild News Contributor