Keepin' It Real 

Economics, Housing, & Commercial Real Estate Analysis

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  • Alex Pettee, CFA


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  • Among the most popular real estate “sub-sector” ETF, the iShares Residential Real Estate Capped ETF offers focused exposure to 44 of the largest rental landlords in the United States.

  • “Renter Nation” has been very good to REZ investors. Residential REITs have outperformed the broader sector over nearly every recent measurement period.

  • This run of outperformance is no coincidence. The effects of the historic underinvestment in new home construction continues to put upward pressure on rent growth and border housing inflation.

  • The mounting housing shortage is amplified by a large demographic wave of young millennials hitting the housing market. Rent growth was impressive in 2018 despite record apartment supply growth.

  • There are some idiosyncrasies that investors should be aware of. The ETF is quite “top-heavy” and invests in property types not typically associated with “residential”, including hospitals and medical office buildings.


  • Alex Pettee, CFA

Read our Real Estate Weekly Review on SeekingAlpha!


  • What shutdown? The rally continued for US equities as the major indices notched their fourth straight week of gains. The S&P 500 has jumped 14% since bottoming in December.

  • Real estate and housing-related equities continue to lead the rally in 2019. REITs are up more than 6% this year, while the Housing Industry Index is up nearly 9%.

  • Housing starts and new home sales data continues to be delayed by the shutdown. Indications are that single-family home sales significantly weakened in the final quarter of 2018.

  • After a dismal end to 2018, housing data is showing signs of life. The MBA Purchase Index, a leading indicator of home sales, climbed to the highest level since 2010.

  • Corroborating the sensitivity of single-family housing demand to mortgage rates, homebuilder sentiment improved in December despite volatile financial markets. Rates, however, remain at the upper-end of the post-recession range.



Consistent with the trends in the starts and permitting data, new and existing home sales data has been generally weak over the last six months following a strong start to 2018. Existing Home Sales stabilized in November, rising to a Seasonally-Adjusted Annualized Rate of 5.32 million, topping estimates of 5.20 million. This was the first month since April that EHS data topped consensus estimates, snapping a six month skid of missed expectations. Despite the beat, existing sales remain lower by 7.0% on a SAAR basis and 2.6% lower on a TTM basis. New Home Sales, however, remain higher by 5.2% on a TTM basis.


We continuing to reiterate that weak trends in existing home sales are not necessary a cause for alarm at this point. By historical standards, new home sales remain at mid-1990s levels and even lower after adjusting for population growth. The growth in existing home sales have slowed since 2015, but this rate remains healthy by historical standards. Too many existing home sales (as we saw from 2003-2006) indicate that either mortgage standards have gotten overly loose or short-term housing flipping activity has increased. At around 7% per year, the turnover rate of existing homes is roughly in line with pre-2000 levels. New home sales remains the key indicator to watch to accurately gague the overall health of the single family housing industry.


Of note over the last several months, however, is that new and existing home inventory is no longer receding, turning positive on a year over year basis for the first time since May 2015. The tight supply of existing homes has been blamed for moderate home sales activity and there is hope that a slight loosening of conditions may lead to increased transaction activity. Looser conditions in the single family markets are also expected to slow the pace of home price appreciation, which has risen at more than double the rate of inflation since 2012. In November, however, EHS inventory declined for the second straight month following a steady rise througout the summer. At 3.9 months, EHS supply in November 2018 is consistent with November 2017 at 3.9 months.


#homesales #inventory

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