By Martin Sumichrast

As a good friend of mine likes to say, "Just when it seems like it will never end, the end is near." So goes the economy.

The U.S. Census reported that new home sales in December 2008 fell to their lowest levels since 1963. Median home prices continue to fall and America's GDP for the fourth quarter declined by 3.8%, the biggest drop since 1982.

On top of this, Congress and the Obama Administration want to spend almost a trillion dollars on economic stimulus, which will add to what the government has already spent the past six months on emergency programs like the Troubled Asset Relief Program, or TARP.

As a result of these factors, most investors are sitting on their cash ($9 trillion by some accounts) and wondering what they should do. Investors are afraid to buy stock, even though dividends of world class companies like General Electric (GE) - Get General Electric Company (GE) Report (which at $12.50 per share pay around 10%) are incredible (Stock Quote: GE). Buying bonds is just as risky because interest rates are going to increase—they simply can't stay at half of 1% forever.

(GE) - Get General Electric Company (GE) Report Let's assume the following scenario occurs: It's mid-2010, the housing decline has stabilized, the economy has flattened out and is inching upward. Governmental spending has lead to a trillion-dollar deficit in 2009 and buyers of governmental paper start to back away. In order to attract the buyers back, the U.S. has to raise interest rates. The result is an increase in inflation. Some pundits, like Dick Morris, have been pushing a potential hyperinflation scenario, where there will be 20% plus inflation rates. What is an investor to do?

Real Estate, a Hedge Against Inflation?

As I remember from my Economics 101 class at Tulane, a great hedge against inflation is real estate. On top of that, interest rates (for conventional loans) are at an all-time low, and there is a historical glut of houses in the market. Whether it's a foreclosed property, a builder who is in trouble or a homeowner who is relocating due to an employment change, houses are selling at bargain prices.

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Sharpen up that pencil, open the home section of the newspaper, log on the internet and start perusing your local housing market. Because now is the beginning of a historic buyers market.

According to Gopal Ahluwalia, vice president of the National Association of Home Builders, the U.S. needs about 1.5 million new homes each year just to keep pace with family expansion, immigration and natural condemnation of existing homes. This means that in a normal course of economic activity, we would be in a supply shortfall of almost 1 million homes. Over the next two years, this supply shortfall will soak up a significant amount of the foreclosures and the supply/demand housing equilibrium will most likely come back into balance.

Multifamily builders are also feeling the pinch. The list of multifamily projects that are being shelved or canceled has grown with apartment developer/owners BRE Properties undefined and Equity Residential (EQR) - Get Equity Residential Report being the latest to pull the plug on projects in response to the soft economy and weakening real estate fundamentals. BRE Properties recently said that it will halt three planned projects on the West Coast. BRE also said it would not start any new projects this year as part of the "deceleration" of its development program. Last week, Equity Residential said it would cancel five apartment projects due to the weak market.

undefined (EQR) - Get Equity Residential Report If you combine a production slowdown with the tremendous dislocation of homeowners due to foreclosures, the result is that more and more families are looking to rent. Therefore, naturally assume the rental market will really be taking off in the next 12-18 months.

No Flipping. Invest Wisely

Flipping homes is a dead business for the foreseeable future. The current play is buying a property and either fixing it up as your primary home or renting it out as an investment. That being said, if buying and renting is not your style but you still want to participate in a beaten down asset class of residential home industry, you can look at buying stock in several national homes builders whose stocks have been decimated in the past two years.

undefined (EQR) - Get Equity Residential Report While I have not conducted an extensive review of the each company, I would say that a cursory review would point me at Pulte Homes (PHM) - Get PulteGroup, Inc. Report . Pulte's merger of Del Webb in 2001 made it the largest retirement builder in America. The stock is down from its all time high of $48 in July, 2005 and hit a recent low in November, 2008 of $7.40. The stock is currently $12.35. One thing for sure is that Pulte is a powerhouse, has a great brand and is at the right price point for a slow housing recovery sector. Also, don't forget the baby boomers and retirement developments. This sector will creep back much faster in the coming 24 months, and Pulte stands to gain from this comeback.

Make Your Money Going In, Not Coming Out

The point of this market is, when all others are panicking, try and remain calm. Most old-timers will say you make the real money during the bad times. A favorite quote of mine is the old school saying that "you always make your money going in, not coming out." So start looking for bargains in real estate. It will take awhile to educate yourself, so the time to start is now. To recap, historically low mortgage rates, cheap homes, buyer's market, increasing demand for rental properties, eventual supply absorption and higher inflation—all suggest that you should look to buy real estate or invest in real estate companies in 2009.

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