Economics, Housing, & Commercial Real Estate Analysis

Keepin' It Real 

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  • Alex Pettee, CFA

Daily Recap: REITs Rally | Stocks Flat | Inflation Cools

US equity markets ended the day fractionally higher on "dovish" comments from Federal Reserve Chair Powell and CPI data showing that inflationary pressures remain muted. The S&P 500 ETF (SPY) edged higher by 0.1% while the Nasdaq ETF (QQQ) finished lower by 0.2% on the day. Retreating from four-month highs set earlier this week, the 10-Year Treasury Yield (IEF) ticked lower by 4 basis points to end the day at 1.87%.

Lower yields boosted the defensive and yield-oriented equity sectors including real estate, utilities, and consumer staples. The broad-based Real Estate ETF (VNQ) finished the day higher by 0.9% with all but two REIT sectors in positive territory on the day. Within the REIT sector, Mid-America (MAA), Store Capital (STOR), SBA Communications (SBAC), and HealthPeak (PEAK) led today's gains.

The Hoya Capital Housing Index, the benchmark that tracks the performance of the US housing industry, finished the day higher by 0.4%, led to the upside by the residential REIT and homebuilding sectors. This morning, the Mortgage Bankers Association reported strong demand for mortgage applications over the past week, as purchase applications were 15% higher than a year ago, a strong signal for home buying activity. Leaders today besides the REITs mentioned above included TriPointe (TPH), Trex (TREX), and Beacon Roofing (BECN). 

Inflation Remains Cool Despite Tariffs

This morning, the Bureau of Labor Statistics released Consumer Price Index data for October. Core CPI rose 2.31% on a year-over-year basis, retreating from last month's 2.36%, and showing signs of cooling yet again following a brief inflation scare in 2018 after the passage of tax reform and the concurrent synchronous global growth. Tomorrow, the BLS will report the Producer Price Index, which has also shown signs of cooling since peaking near 3% in late 2018, retreating below 2.0% in the prior month. Released last week, at 1.67%, Core PCE is still well below the Fed's "symmetrical" inflation target of 2.0% and has lost steam over the last two months.

Housing costs continue to be the primary driver of what little overall inflation that there is. Housing (CPI: Shelter) accounts for more than a third of the total CPI weight (42% including housing-related services), and since 2013, housing inflation has been significantly above the overall inflation rate. From 2015 through late 2016, housing inflation was one of the only components keeping Core CPI out of deflationary territory, and since 2013, core inflation excluding housing has averaged roughly than 1%. Consistent with earnings results from the apartment REITs and private-market data showing solid rent growth since late 2018, CPI Shelter remains well above the broader rate of inflation at 3.3%. Primary rents rose 3.4% on a year-over-year basis while Owner Equivalent Rents rose 3.3%.

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