Displaying items by tag: reits

(New York)

Many in the industry think a big bust in commercial real estate (CRE) is coming. If you think of the residential real estate market, you probably think about tight supply, rising prices, and more buyers than sellers. The commercial real estate market is currently characterized by the opposite conditions. A building boom and a glut of new CRE debt is threatening to wipe the sector out. The sector looks very vulnerable to rising rates because the massive amount of debt (which just hit a record) and the overindulgence of borrowers. So how can one play the fall? Oddly, the best strategy might be to buy homebuilders, who will be much less sensitive to rate rises, and sell REITs.

FINSUM: The paired strategy sounds like a good one, but the bigger theme here is that a bust in CRE is reportedly on the horizon.

(New York)

A flattening yield curve is almost universally seen as bad news, and with good reason. A flattening curve is one of the most reliable recession indicators, with a yield curve inversion successfully portending the last six recessions. Now that we are close to an inversion, experts are weighing on how to play it. One thing to remember is that the peak in stocks tends to not come until several months after the inversion itself, so it is not an immediate divestment indicator. One analyst from Canaccord Genuity says to get overweight “financials, info tech and industrials with an intermediate-term time horizon”. Utilities and REITs are another area to look.

FINSUM: A flattening yield curve is going to be frightening to everyone, especially in the current environment, so our own view is that the peak in stocks may be much nearer to the inversion this time (or it might have already happened).

(New York)

A new study out of Harvard makes a very interesting point about US home prices. While real estate prices have seen a strong and steady rise since the bottoms of the Crisis, and prices in many markets seem very lofty, the truth is that the cost of owning a home actually hasn’t risen for the last thirty years. How is that possible? The answer is that while home prices have risen compared to income, interest rates have also fallen strongly, meaning the monthly mortgage payment it costs to actually own a home has remained pretty much flat sine 1987 (on an inflation-adjusted basis).

FINSUM: So this is a good point, but the reality is that the monthly payment does not account for the huge down payment that families now need to come up with (which they did not back when interest rates were at 12%).

(New York)

Bloomberg has come out with a very interesting piece about how climate change has been affecting the US real estate market. A new study looked at over 3,000 US cities and mapped them by risk to different types of climate change-drive natural disasters, like hurricanes, floods, and wild fires. What the study concluded was quite striking—in all of those categories, the riskiest locations had seen values drop considerably, while the safest locations had seen major gains. For hurricane surge risk, for instance, the “very low risk” locations had seen annual gains of 8.1% between 2007 and 2017, while the “very high risk” locations saw annual losses of 9.1%.

FINSUM: It is interesting to see that Americans have been taking account of these risks for some time even as the national debate over climate change rages on. This could be a major new differentiating factor in real estate.

(New York)

There have been some serious warnings about real estate from reputable sources lately, but not much data to support them. To this point, most fears have been centered around how rising rates might hurt the market, but none of that had emerged in the data, until now. A new US housing report has just showed that sales of existing US homes fell 2.5% in April. Low inventory and higher prices seem to be putting a dampening effect on buyers, says the Wall Street Journal.

FINSUM: This is a worrying stat for us, and its importance is elevated by the fact that the figure comes from April, which is part of the all-important spring home-buying season. The next few months of data will be very important.