Economy
(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.
(New York)
Real estate across northern cities is taking a pummeling right now. There appears to be a significant exodus of wealthy homeowners leaving high-tax northern states like New York and New Jersey in favor of sun belt areas with lower taxes. The big catalyst for the move has been the elimination of SALT deductions above $10,000. Florida, for instance, has no state income tax and no estate tax. Accordingly, Miami, as well as other sun belt cities like Las Vegas and Phoenix, have seen real estate markets holding up well compared to the trend across the north.
FINSUM: Northern states are going to have to adjust (assuming the federal government doesn’t change policy) as the logic is just too simple for people right now: “should I live in a cold place with high taxes, or a warm place with great weather and low taxes?”.
(New York)
If one thing is really clear in the economy, it is that the housing sector’s momentum is clearly negative. Home sales slumped badly in November and then worse in December. Further, home buying traffic plunged too. This is not necessarily a surprise when you consider how much mortgage rates have risen, but contrasted with how well the labor market is doing, it is quite eye-opening.
FINSUM: We are going to come in with a contrarian viewpoint here. Consider these stats, all reported by Barron’s: “The median home value in December was $223,900, up 7.6% over the past year, according to real-estate listing service Zillow. That is up from about $150,000 in late 2011. Properties are sitting on the market an average of 78 days, down from 114 days in 2016. The mortgage delinquency rate is a low 1.1%, and just 8.2% of houses had negative equity—well below levels of a few years ago. The foreclosure rate has plunged to 1.2%, down from 6.3% in 2009”. That shows a very different picture!
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(New York)
If you have been paying attention to the mortgage market, you will see that some of the most worrying lending activities from the pre-Crisis era are returning. For instance, there has been a sharp recent rise in loans to non-traditional borrowers, or those who have trouble proving their income. The amount of such loans looks to have almost quadrupled in 2018 versus the year before. So far these loans look to be healthy, but there are concerns that in a downturn such mortgages could deteriorate quickly.
FINSUM: These loans are subject to more stringent regulatory standards than back before the Crisis, but this is certainly something to keep an eye on.
(New York)
While markets have calmed down somewhat from December’s chaos, there are still worries over the domestic and global economy. Part of those worries is the real estate market, which continues to sink into a notable slump that could either prove a blip or an important leading indicator. December homes sales fell 6.4% from the previous month and a whopping 10%+ from last December. The market is suffering from significantly elevated mortgage rates and a lack of starter homes. The big fall in sales is counterintuitive because of the currently strong labor market.
FINSUM: The housing market reflects interest rate rises in a very pure way. The big question is whether this is a leading indicator or a slowdown that is idiosyncratic to the sector. To be honest, we think it is some of both.
(New York)
If you think the real estate market is bad now, just wait. That is the argument from James Stack of InvesTech Research. Stack accurately called the last housing crisis and also forecast the slowdown in 2018. Now he is saying that 2019 is going to be the worst year for a long time. “Expect home sales to continue on a downward trend in the next 12-plus months. And there’s a significant downside risk to housing prices if a recession takes hold”, says Stack. He does admit that it is too hard to say if housing is currently in a bubble, but that prices are very likely to fall.
FINSUM: Mortgage rates have risen sharply and prices are quite elevated, so it is no wonder prices have fallen. However, real estate hasn’t seen the exuberance it did pre-Crisis, so we do not think this will be a meltdown by any means.