Southampton - Southampton's own hedge fund star John Paulson recently made a speech at the University Club of New York advocating investment in real estate. To put his money where his mouth is, Paulson has since added new real estate pieces to his already prized collection. This article examines what drives seasoned investors like Paulson to purchase property now, at the time when others remain ambivalent about the real estate market.

In a nutshell, three economic developments drive savvy buyers to commit their funds to bricks and mortar:

1. The prospect of high inflation
2. Low interest rates
3. Overabundance of real estate deals in the wake of the latest financial crisis.

The first two events, inflation and low interest rates, are key to unlocking the real estate profits over time: high inflation reduces mortgage interest payments in "real" terms of property prices.

Specifically, inflation is a phenomenon that increases prices of "real" tangible goods, such as metals, food and, yes, real estate. Inflation of, say, five percent signifies a five percent annual increase in average prices on real goods. Over the past three years, inflation levels have fallen from five percent registered in the middle of 2008 to negative two percent in 2009 and have since risen back to positive two percent. A rise in inflation is by now considered unavoidable and imminent by most economists, including the Chairman of the U.S. Federal Reserve, Ben Bernanke.

Low interest rates, five percent or less at present, coupled with high inflation of five percent or more, mean that financing a real estate purchase becomes cost-free in real terms: for every dollar the buyer spends on mortgage payments per year, the value of his real estate inflates by the same or greater amount, negating the cost of the mortgage. This equation works with fixed interest rate mortgages only, as the variable rate mortgages rise along with increases in inflation.

Not in the market for a new property? Have a portfolio a tad too heavy with real estate as is? Not to worry. You can still participate in the real estate investment through common-stock like the Real Estate Investment Trusts (REITs). REITs have been around since the 1960s and are publicly traded on major stock exchanges, like NYSE and NASDAQ. Just like common stocks, they can be bought and sold through your broker or investment account, and REITs afford their buyers the same protection of the U.S. Securities and Exchange Commission (the SEC) as do traditional widely held stocks of companies like IBM and Coca-Cola. Some notable REIT names are CLP, VNO and AKR; VNQ is an ETF that mimics performance of the REIT sector.

Whether through actual property purchases or in the stock market, real estate investment is certainly something to consider in the current economic environment.