Displaying items by tag: real estate

(New York)

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.

(New York)

The amount of data pointing to recession is growing strongly. Not only are rates and yields rising quickly, but housing has been showing much weakness. Now there is another major leading indicator flashing red—commodities. Commodities are often seen as a key economic bellwether as they tend to show aggregate demand ahead of actual economic figures. By that measure, things are looking bad. Bloomberg’s commodity index has dropped 5% this summer, with both agricultural commodities and metals performing poorly. One factor hurting commodities is the Dollar, as the currency is strong and because commodities are priced in Dollars, it tends to hurt foreign demand.

FINSUM: Everything we are seeing seems to point to a peak. Housing has turned negative, commodities are weakening, and rates are rising. Did the stock market see its bull market peak last week?

(New York)

The US economy is on fire. Growth is strong, consumer confidence is high, and (somewhat worryingly) the Fed is almost giddy. However, even the greatest optimists will have a gnawing fear caused by the US housing market, which has been in decline for the past handful of months. The huge rising gap between home prices and wages has finally stalled the market, all while rates move higher and dampen demand. The big risk that no one is pointing out, though, is how that trouble in housing will flow through to the broader economy. It will likely not be via mass mortgage defaults and foreclosures like last time, but rather through a severe tightening of purse strings. The big rise in home prices means Americans disproportionately hold their wealth in home values, so a decline will cause a major loss of wealth, and thus spending, seizing up the economy.

FINSUM: In 1978 a 20% decline in home prices would have caused a 1% decline in aggregate income. Today, the same decline would cause a five percent drop, or about $600 bn of lost equity. Housing may still lead the economy downward.

(New York)

Investors need to be careful, real estate looks likely to take a pounding in the coming months. While all the focus on the big jump in yields has been on how it has impacted bonds and stocks, one of the big risk areas is real estate. Unlike other parts of the economy and markets, real estate has been teetering for some time, with months of weak performance. REITs and real estate stocks have been selling off strongly over the last couple of days and the reason is clear—the last thing the already weak housing market needs is higher borrowing costs.

FINSUM: We think the move higher in rates and yields could spell a significant downturn for real estate. Prices are so high and demand is already starting to dry up, so higher yields may have a further dampening effect.

(Miami)

Anyone who has been even remotely watching the real estate market this year will note that the housing sector has been struggling. The well documented issues in the real estate market have caused housing stocks to have a very weak year, with multiple homebuilders recently hitting 52-week lows. This has made some worry that trouble in housing may be a leading indicator of an economic downturn to come. However, historically speaking, the opposite has been the case. Housing (combined with automotives) account for just 6.5% of GDP right now, the historical low end of their range, which is good news. Traditionally, it has been when housing gets to be a major part of the economy (e.g. 10% pre-Crisis) that trouble comes.

FINSUM: The trouble in housing has much less to do with the wider economy than it does with industry-specific factors like demographics, planning restrictions, and saturation. We do not expect housing to be necessarily representative of the direction of the US economy.