Advisors have probably started to see some discussion of so-called “opportunity zone” investing. The idea of the concept is to invest in designated “opportunity zones”, which are economically depressed areas, and reap benefits. But the real opportunity is in the tax treatment of such investments. Barron’ sums it up this way, saying “How significant? If you roll the capital gains from the sale of anything—your home, shares of Amazon.com , a Modigliani—into a “qualified opportunity fund,” and hold for 10 years, you get to defer paying capital-gains tax until the end. Then you’re taxed on just 85% of the original investment, and 0% on any money generated by that initial money”.
FINSUM: This is a very good plan for people who don’t need the immediate liquidity associated with some asset sale and want to defer a lot of capital gains. There are several firms that are setting up special funds just for this new purpose.
Luxury real estate is an interesting corner of the housing market for a number of reasons. It is not subject to the same sort of macro trends that affect the rest of the real estate market, such as mortgage rates directly influencing pricing and demand. Therefore, it is often overlooked as a barometer of the sector. However, if you pay attention, luxury real estate actually works as a solid leading indicator of the broader real estate market. While it is insulated, it is not immune from the same forces as its mass market brethren, and rates, stock prices, foreign buying and beyond all affect it. For instance, the chief economist at Redfin comments that “When people have more wealth because of stock gains, they have more money to spend on luxury homes … But if some luxury buyers think the stock market isn’t going to do as well, there may be an increase in investment in real estate because it’s seen as a safer place to put money”.
FINSUM: The problem with correlating the stock market and luxury housing is that both stocks rising and falling can boost luxury real estate, as rising shares mean more wealth to splash out on homes, while a weaker market can boost the sector because of safe haven characteristics.
More bad news is flowing out of the housing market. For the last several months, home sales, new builds, and demand has been falling. Prices are down in some major metropolitan areas. Now, new data shows that mortgage demand is contracting. US mortgage applications fell to their lowest level since 2014 in recent weeks. This comes on the back of mortgage rates rising to their highest since 2010.
FINSUM: There have been eight rate hikes since 2018 and home prices are at lofty levels. A downturn should come as no surprise.
Housing stocks are in a real slump right now. Many homebuilders are in a full bear market following months of slowing home sales and new construction. For instance, the iShares U.S. Home Construction ETF is down 26% this year. That said, take a look at two stocks that seem like they have strong upside—Ingersoll-Rand (IR) and Lennox International (LII). Both companies are in the HVAC sector of housing, which is a strong niche.
FINSUM: What is so strong about the air conditioning and heating (HVAC) sector is that it is at the start of a big replacement cycle. These machines typically last 12 to 15 years, so there is an ongoing boom in replacement of the huge amounts of these systems installed in the 2003 to 2006 housing surge.
Everyone know the housing market is facing some headwinds. Strong home price growth combined with higher rates is hurting demand. Accordingly, sales and new activity have been falling since the late spring. However, new data shows that home prices seem to have already entered a cyclical downturn that is only going to intensify. A combination of low affordability, slowing demand, and higher rates have conspired to bring down home prices, and it does not look like things will turn around quickly. The Fed is already warning about real estate being a “downside risk” for the economy.
FINSUM: The whole housing market seems to be slowly, but surely, stalling. Homebuilder stocks have been hammered, prices are falling, and rates are rising. It seems like we are in for a downturn.
How does a REIT with great long-term business fundamentals and eye-popping yields sound? If that sounds good, take a look at Ventas. The REIT owns 1,200 properties, many focused on senior and assisted-living facilities. The long-term business looks very healthy as demographics—including retiring Baby Boomers—are a major growth opportunity for the REIT. The dividend yield is a strong 5.7%, and it appears safe, according to Morningstar.
FINSUM: Definitely seems like a REIT worth some more investigation. We like the combination of good yield and strong long-term fundamentals.