Keepin' It Real 

Economics, Housing, & Commercial Real Estate Analysis

1/1
Housing100logo.png
ETF express.png
  • Alex Pettee, CFA

Sell-Off Drags On Despite Strong Home Sales [Daily Recap]

  • U.S. equity markets were unable to hold onto early-session gains on Wednesday as coronavirus-related concerns resulted in a fifth straight day of losses.

  • Following consecutive 3% declines, the S&P 500 finished lower by 0.4% while the Dow Jones Industrial Average dipped by 120 points, bringing the weekly point losses to over 2,000 points.

  • The 10-Year Treasury Yield declined 2 basis points to end at 1.31%, another historic closing low as investors increasingly expect at least two Fed rate cuts by year-end.

  • After outperforming for the first two days of the week, the broad-based commercial Real Estate ETF (VNQ) finished lower by 1.1%. Strong gains from the self-storage and prison REIT sectors were offset by weakness from retail REITs.

  • New Home Sales blew past estimates in January, jumping 7.9% from last month to a 764k annualized rate, the best monthly rate since July 2007. Sales are higher by 18.5% from last year.

Real Estate Daily Recap

U.S. equity markets were unable to hold onto early-session gains on Wednesday as coronavirus-related concerns resulted in a fifth straight day of losses. Following consecutive 3% declines, the S&P 500 ETF (SPY) finished lower by another 0.4% on the day while the Dow Jones Industrial Average (DIA) dipped by another 120 points, bringing the weekly point losses to more than 2,000 points. The 10-Year Treasury Yield (IEF) declined 2 basis points to end at 1.31%, another historic closing low. After outperforming for the first two days of the week, the broad-based commercial Real Estate ETF (VNQ) finished lower by 1.1%, led to the upside by strong gains in the self-storage and prison REIT sectors, but dragged down by retail REITs.

New Home Sales blew past estimates in January to the best monthly rate since July 2007 as the housing industry continues to be a source of economic strength amid the recent period of volatility. Despite strong housing data, however, single-family homebuilders sold-off after results from Toll Brothers (TOL), which dipped after the luxury homebuilder missed Q1 deliveries estimates despite reporting a 31% surge in the critical net new orders metric. A theme that we've discussed extensively in our Homebuilders report, builders focused on the entry-level segment continue to outperform those that cater to higher-end buyers. Lowe's (LOW) also lagged after reporting comparable sales growth of 2.5% in the fourth quarter versus 3.5% estimates. Yesterday, rival home improvement retailer Home Depot (HD) reported strong fourth-quarter results with comparable sales up 5.3%.

Forward-looking economic indicators including Homebuilder Sentiment and mortgage demand continue to suggest that the housing market reacceleration has room to run. The MBA Purchase Index, a leading-indicator of Existing Home Sales, is higher by 10% from the same week last year as lower mortgage rates continue to be a significant tailwind for the broader US housing industry in 2019. At 3.49%, the Freddie Mac 30-Year Mortgage Rate is roughly 85 basis points lower than the level in the same week last year, and recent movement in the 10-Year Treasury Yield suggests that we'll eclipse the all-time record lows of 3.31% back in November 2012. Over the past half-decade, there has been a very strong correlation between changes in mortgage rates and growth in new home sales, as highlighted in the chart below, suggesting that the reacceleration seen this year may still have room to run.

Storage and prison REITs were the clear leaders within the commercial REIT sector on the day. Public Storage (PSA) gained more than 3% after reporting better-than-expected core earnings results yesterday afternoon as same-store NOI growth edged up 0.1%, reversing a decline over the preceding quarters. Prison REITs GEO Group (GEO) and CoreCivic (CXW) gained more than 2% each despite being a focus of a contentious Democratic debate last night. As explained in our Prison REIT report, this sector tends to trade with high correlations to the implied betting market odds of the outcome of the 2020 Presidential election. According to Politico, every current Democratic candidate currently polling at 5% or greater has called for the elimination of federal utilization of private prisons.

The pain in the mall sector continued after Pennsylvania REIT (PEI) plunged to 11-year lows after warning that it expects it won't meet some financial covenants this year. Earnings also came in weaker-than-expected with same-store NOI growth dipping 2.5% for full-year 2019. Interestingly, PEI forecasts positive 1% NOI growth in 2020, on-par with mall REIT stalwart Simon Property (SPG), which has consistently produced NOI growth well above the lower-productivity mall REITs. We think NOI growth at PEI will ultimately be closer to the -9% guidance from similar lower-productivity mall REIT CBL & Associates (CBL). We will analyze the full slate of mall REIT earnings results and comment on recent mall M&A activity in a report published tomorrow following earnings results from Washington Prime (WPG).

REITs reporting after the close today include Crown Castle (CCI), Getty Realty (GTY), Innovative Industrial (IIPR), Jernigan Capital (JCAP), and Park Hotels (PK), among others. Our Real Estate Earnings Preview compiled the notable earnings that we're watching across the residential and commercial real estate sectors. We'll have additional coverage on iREIT on Alpha as well as our Real Estate Weekly Outlook.

To continue reading, click here to visit Seeking Alpha!

  • Facebook Social Icon
  • Twitter Social Icon
  • LinkedIn Social Icon

Hoya Capital Real Estate, LLC

Invest@HoyaCapital.com

(833) HOYA-CAP

Hoya Capital Real Estate ("Hoya Capital") is an SEC-registered investment advisory firm that provides investment management services to ETFs, individuals, and institutions, focusing on portfolio and index management of publicly traded securities in the real estate industry. It is not possible to invest directly in an index. Index performance cited in this website or commentary does not reflect the performance of any fund or other account managed or serviced by Hoya Capital Real Estate. Nothing on this site nor any published commentary by Hoya Capital is intended to be investment, tax, or legal advice or an offer to buy or sell securities. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and should not be considered a complete discussion of all factors and risks. Data quoted represents past performance, which is no guarantee of future results. Investing involves risk. Loss of principal is possible. Investments in companies involved in the real estate and housing industries involve unique risks, as do investments in ETFs, mutual funds, and other securities. Hoya Capital has no business relationship with any company discussed/mentioned. Hoya Capital never receives compensation from any company discussed/mentioned. Hoya Capital, its affiliate, and/or its clients and/or its employees may hold positions in securities or funds discussed on this website and our published commentary. A complete list of holdings and other important disclosures and definitions are available by clicking the links below.

Privacy Policy 

 Client Relationship Summary 

Hoya Capital's ADV Part 2

Important Disclosures, Definitions, & List of Holdings 

Seeking-Alpha-Logo.png

The Easy Way To Invest In Real Estate