Eq: Real Estate
(New York)
The high end of the real estate market is faltering, and banks are feeling it acutely. So-called jumbo mortgages, or those outside of Fannie and Freddie backing, have been shrinking recently. In a sign of caution from rich home buyers, issuance of jumbo mortgages fell 12% last year and were off 27% from their post-Crisis peak a couple of years ago. That compares to just a 7% decline in normal mortgages last year. Jumbo mortgages dominate some cities. For instance, 61% of mortgages in Manhattan qualify as such. Banks are feeling the sting as jumbo mortgages have been a big profit center for them in recent years.
FINSUM: The housing market is slowing in all areas. The big question is whether this is a leading indicator of a recession, or just an isolated asset-level downturn.
(New York)
The real estate market has been heading south for almost a year. Disappointing numbers keep coming in, but there has not been major urgency or alarm. In fact, homebuilders are having a stellar year, up almost 20% and well above the S&P 500’s gain. However, Stephen Kim at Evercore is warning that investors should be wary of hosuing stocks. Citing the most risky names as DR Horton, PulteGroup, Toll Brothers, and KBHome, Kim says about the group that “Hope is not a strategy”. Kim was bullish on the shares in the Fall before their big move higher, but now believes they are fully valued.
FINSUM: The trend may be your friend, but given the direction of the housing market and the big recent price rises, we wouldn’t want to be long the homebuilders index right now.
(New York)
Another month, anther patch of really rough data on the US real estate market. New data from December has just been released, and shows a clearly negative trend for the market. Housing starts dropped 11.2% in the month, and overall, the market saw the worst price growth (4.7% in major metropolitan areas) since 2014. Stock market turbulence and higher rates plagued the market at the end of 2018.
FINSUM: We have seen many months of deteriorating real estate performance. The big question now is whether the market can rebound in time for the peak spring selling season.
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(New York)
Along with warehouse growth, data center expansion is one of the hottest areas of commercial real estate. So how to play it? These REITs were hit pretty hard at the end of the year, but they are now making a strong comeback. The big driver at the macro level is demand for cloud services and the growth of AI, both of which increase the need for data center space. Four stocks to look at are Equinix, CoreSite Realty (COR), Iron Mountain (IRM), and InterXion Holding (INXN).
FINSUM: Data centers seem to have some strong growth drivers behind them, and along with warehouses, we think they are strong ideas for REITs.
(Washington)
We think we might have found an area when Democrats and Republicans might agree. Here is an interesting argument—Fannie Mae and Freddie Mac distort the housing market and negatively affect renters. This is a conclusion from the Wall Street Journal, which found that the subsidized loans from the agencies artificially lowered interest rates on multi-family properties (apartment buildings), which helped developers in acquiring them. The developers then go on to raise rents. In some cases, owners of big units refinance using agency mortgages and are therefore rewarded for raising rents.
FINSUM: From the left’s view, this hurts everyday Americans by raising rent prices. From the right’s view, this is an example of how big government distorts the economy. All that said, in single family housing, the agencies still seem to have benefits that outweigh their negatives.
(New York)
One could argue that we are in a stock pickers’ market. With valuations down and no clear narrative to lift all boats, the market seems set to let stock pickers shine as companies start to trade on their fundamentals more than in the last few years. With that in mind, here are four of the best REIT picks. REITs are a very diversified group, and picking them now is more complicated than ever given rising rates and slumping real estate markets. The best areas in REITs right now are those that deal in ecommerce warehousing as well as data centers. Here are 4 picks that could do well: Hersha Hospitality Trust (HT), CyrusOne Inc. (CONE), Federal Realty Investment Trust (FRT), and Stag Industrial (STAG).
FINSUM: We think the industrial REIT area (ecommerce warehousing) seems to be a really good choice as the underlying demand for space is steady and growing.