If you listen to most pundits, you would think housing is on its way back.
But I don't listen to people. I do my own research and make up my mind.
And what I've found is that this housing rally is a double-edged sword. But if you're smart you take advantage of its potential while eliminating much of its real risks.
The one edge: A more active market is undoubtedly good for the economy, since it leaves less money trapped in houses people no longer want. But rising prices are not good news, as I explain below.
The other: There are still some excellent opportunities in the real estate sector through real estate investment trusts (REITs), but you need to very selective (also below).
And as usual, it's all about 3 things: location, location, location.
Except this time around, it's not the locations you would think.
A Cautionary Tale
Let me explain by example…
I have just returned from Britain and the trajectory of that economy shows very clearly: High real estate prices are a major competitive disadvantage.
House prices in Britain are much higher than in the United States. The average house price in June 2013, according to Rightmove's house price index, was 253,000 pounds, about $382,000 at today's exchange rates.
That compares with about $266,000 in the U.S., taking a weighted average of new and existing home sales prices. However, you have to add into this calculation the reality that British incomes are only around 80% of U.S. incomes, when converted at market exchange rates (about 75% at purchasing power parity).
So in terms of earning power, U.K. house prices average about 80% higher than U.S. house prices.
That doesn't take into account the fact that British houses are on average substantially smaller than U.S. houses, or the exorbitant additional costs of trying to live in London, Britain's bloated capital, where house prices have been pushed up by the advent of wealthy Russians.