Meredith Whitney, who previously forecasted the financial crisis in the mid-2000s, sees downside for the housing market, driven by changes in behavior among younger men. She sees the beginning of a multiyear decline in housing prices as the lower levels of household formation among men negatively impact demand. 

On the supply side, she sees more homes for sale due to the aging demographics of homeowners. Whitney’s perspective deviates from the consensus, which sees home prices as remaining elevated due to a lack of supply, coupled with a bulge in demand as Millennials enter their peak consumption years over the next decade. This year, most Wall Street banks are forecasting a mid-single digits increase in home prices. 

Another factor impacting housing supply is that the vast majority of mortgages were made at much lower rates. While many asset prices have declined due to the impact of high rates, home prices are an exception. Whitney contends that “normally you would think as rates go up, home prices would go down, and that hasn’t happened over the last two years. I think home prices will normalize because as more inventory and supply come on the market, you’ll see a true clearing price that is lower than it is today. So, I would say 20% lower than it is today.” 

Finsum: The consensus view is that home prices will continue rising due to low supply and demographic-driven demand. Meredith Whitney, well-regarded for predicting the financial crisis, is bearish on the asset class.

REITs have had an uneven start to the year due to the outlook for monetary policy becoming less dovish. Many investors are interested in taking advantage of this weakness, given the sector’s solid fundamentals and attractive yields. Yet, they may want to minimize exposure to volatility, which is likely to persist given an uncertain outlook for monetary policy. So, here are two lower volatility REITs for more conservative investors.

W.P. Carey (WPC) owns commercial and industrial properties across North America and has a 6.2% dividend yield. WPC is extremely diversified, as no single industry accounts for more than 10% of its tenants, and its biggest single tenant accounts for less than 3% of total revenue. 

In addition to its diversification, WPC also has less risk than competitors due to being a net-lease REIT. This means tenants cover taxes, insurance, and maintenance. The company also negotiates rental rate increases that are built into contracts, providing another layer of security.  

Digital Realty Trust (DLR) provides exposure to data centers, pays a 3.4% yield, and has hiked its dividend every year since 2005. This segment saw massive growth over the last decade due to the rise of cloud computing and should enjoy another healthy tailwind over the next decade due to artificial intelligence. 

DLR’s data centers enable the distribution of technology to users for consumer and commercial applications. The company has more than 300 data centers in over 25 countries and counts companies like Meta, JPMorgan Chase, and Verizon among its customers.   

Finsum: REITs have underperformed to start the year. Yet, the sector still holds appeal due to attractive yields and solid fundamentals. DLR and WPC are two REITs with lower volatility that may appeal to more conservative REIT investors. 

2024 has been underwhelming so far for REITs, as evidenced by the iShares US Real Estate ETF’s YTD 4.5% decline, while the S&P 500 is up 9% YTD. Two major reasons for this underperformance are continued struggles for the office segment and less clarity about the outlook for monetary policy, following a series of stronger than expected labor market and inflation data.

However, the intermediate-term outlook for the sector remains favorable due to attractive yields and earnings growth despite a challenging, near-term environment. Further, most segments are in good shape. According to Steve Brown, the senior portfolio manager at American Century Investments, “The REIT industry is very diversified among different sectors like data centers, towers, and industrial, and office is only about 4 or 5 percent of the index. So while office has issues, many other property sectors have pricing power and can raise rents greater than inflation.” 

He also favors public REITs over private REITs, as public REITs are cheaper while offering more liquidity. He notes that many private REITs are still trading at or just above net asset value (NAV), while public REITs are trading at an average 20% discount to NAV. Overall, he sees a much more benign environment in 2024, especially once the Fed starts cutting rates.  

Finsum: REITs have had a rocky start to the year. However, the fundamentals for the sector continue to improve, while many of its challenges are already reflected in depressed valuations.