The new real estate boom. Really.

The housing market is still a mess but funds that invest in real estate stocks are on fire this year. Here's why the comeback may be for real.


Oil hit another record high on Friday. So it's no surprise that natural resources mutual funds, funds that invest in energy companies and other plays on surging commodities, are the best performing domestic stock funds this year.

At the same time, real estate news just gets worse and worse, and on Friday, construction of single-family homes fell to a new 17-year low. But guess what the second-best performing fund category is so far this year?

That's right - real estate funds.

TalkBack: Is now a good time to invest in real estate?
Those funds that primarily invest in companies known as real estate investment trusts (REITs) are up more than 7%, according to Morningstar, trailing only the 13% gain in natural resources funds.

What's behind this real estate "boom"?

For starters, it's worth pointing out that real estate funds probably had nowhere to go but up. Many leading REIT indexes were down more than 15% last year.

But now, there are signs that the capital markets are stabilizing, which would continue to help REITs.

"I'd be a fool to say I'm not concerned about the economy and what it means for real estate fundamentals but the group took a big hit last year. If you look at how far it fell, it was probably overdone," said Robert Gadsden, manager of the Alpine Realty Income and Growth fund.

Gadsden said that another reason to like REITs right now is because the Fed's rate cuts have led to lower bond yields and relatively low rates on savings accounts. REITs, however, are required to pay a large chunk of their earnings back to investors as dividends.

"REIT stocks are a good yield play," Gadsden said.

The average dividend yield for the stocks in Gadsden's portfolio is 5.2%, compared to an average of just 2% for the S&P 500 and about 3.9% for a U.S. 10-Year Treasury.

Still, it may be premature to declare that the real estate market, especially for housing, has bottomed.

"The move in REIT stocks is not really about fundamentals. It's a psychological shift. The market wants to call the turn in real estate," said Kevin Means, managing partner with Alpha Equity Management, which subadvises the RidgeWorth Real Estate 130/30 fund.

Means said he's now concerned that there may be "frothiness" in some real estate stocks. However, he seeks to take advantage of that by short-selling some stocks (i.e. borrowing shares and selling them with the hopes of profiting by buying them later at a lower price).

The 130/30 in the fund's name means that he takes 30% of the proceeds he gets from short-selling stocks and uses them to buy more real-estate related stocks. (He is not limited to just buying REITs.) That allows him to have a 130% long position in the sector.