The Ignorant Investor

Back in November of 2005, I wrote about REITs after seeing a story about all the market professionals who were piling into the asset class even though it seemed overvalued:

I'm sorry I missed the boat on commercial property REITs, and I've been thinking of dropping money into the sector for the long term. But they're trading at a significant premium over the market value of the properties they own, and the estimated yields on these ETFs are at a bond-like 5% or so (I say estimated because apparently actual yields on REITs depend on end-of-year accounting and won't be known until January 2006 at the earliest). In other words, they're pretty darn expensive, we likes to buy our preciouses when priceses are low when compared to historical averages.

At the time, the iShares Dow Jones US Real Estate ETF (IYR) was trading at around $61. Over the next 13 months, the price rose steadily, eventually reaching a high of around $90. I probably kicked myself a few times since then, but I always figured it was going to come back down to Earth. And it did. After a brutal year, it's back down to $61. Just shows that investors can pile out of an asset class as quickly as they piled into it.

IYR is now 30% off its Jan. '07 high. It might be time to start buying it. One worry: the yield is still only around 4.3%. P/E is 23x earnings. It's not valued into the stratosphere like it used to be, but it's not dirt cheap yet.