REITs are an interesting sector at the moment. The real estate sector is obviously past peak, and rates are rising, a double whammy for REITs. The initial reaction for many would be “stay away”, however, there is some value to be had. One interesting area is in regional mall REITs, which have actually outperformed the S&P 500 this year. There is a lot of variation in quality between different regional malls, however. In particular, the performance is bifurcating between the very best malls and the rest, with the former thriving, and the rest lagging.
FINSUM: The US has 1,000 malls and some estimates say there is only enough demand to solidly support around 300. The ones that stick around, particularly the top 20, will likely do very well.
One of the surest signs in the economy right now is that real estate is in trouble. Data coming out of the sector has been consistently weak for months and shows a clear downtrend in the housing market. Rates seem to be playing a big part of that, as demand for housing has sunk as rates have risen. That could prove one of the few brakes on the Fed’s relentless rate hike path. The fall in real estate comes at a time when the market should be surging, as unemployment is at extreme lows and Millennials are entering their peak home buying years.
FINSUM: Besides stocks and bonds freaking out, real estate is one of the areas showing a lot of weakness, and this it is perhaps one of the few aspects that could stop the Fed.
There is a lot of focus on stocks, bonds, and oil right now, but a very important US asset class is sending increasingly bleak signals: real estate. Data out of the sector has been growing weaker for months, and now new figures reinforce the trend. US homebuilder confidence has fallen to its lowest level in two years. The National Association of Homebuilders commented that “While home price growth accommodated increasing construction costs during this period, rising mortgage interest rates in recent months coupled with the cumulative run-up in pricing has caused housing demand to stall. As a consequence, builders have adopted a more cautious approach to market conditions”.
FINSUM: The rea estate market is slowly but surely tightening up. However, because price gains were never as over-the-top as pre-Crisis we only expect shallow declines as the next recession unfolds.
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.