• Alex Pettee, CFA

Shutdown Looms • Rents Soar • Housing Heats Up

Summary

  • U.S. equity markets rebounded following their worst declines since May as better-than-expected housing data offset concerns over partisan gridlock in DC including a potential looming government shutdown.

  • Following declines of 2.0% yesterday, the S&P 500 finished higher by 0.1% today while the Mid-Cap 400 finished fractionally higher and the Small-Cap 600 gained 0.4%. The tech-heavy Nasdaq 100 declined 0.2%.

  • Real estate equities outperformed for the second-straight day as the Equity REIT Index finished higher by 0.7% today with 16-of-19 property sectors in positive territory while Mortgage REITs gained 0.1%.

  • Fresh data yesterday from Zillow showed that the pace of rent increases continues to accelerate across the country with median rents soaring 11.5% in August from a year earlier.

  • The for-sales market is heating up as well as Pending Home Sales - a leading indicator of the health of the U.S. housing market, rose significantly faster than expected in August, reversing two months of declines.

Real Estate Daily Recap

U.S. equity markets rebounded following their worst declines since May as better-than-expected housing data offset concerns over partisan gridlock in DC including a potential looming government shutdown. Following declines of 2.0% yesterday, the S&P 500 finished higher by 0.1% today while the Mid-Cap 400 finished fractionally higher and the Small-Cap 600 gained 0.4%. The tech-heavy Nasdaq 100 declined 0.2%. Real estate equities outperformed for the second-straight day as the Equity REIT Index finished higher by 0.7% today with 16-of-19 property sectors in positive territory while Mortgage REITs gained 0.1%.

Upward pressure on treasury yields continued today as the 10-Year Treasury Yield climbed another basis point to close at 1.54% today, the highest since June - while the U.S. Dollar Index (DYX) climbed to the highest level in nearly a year. Despite the rise in rates today, yield-sensitive sectors were among the leaders today as the Utilities (XLU), Consumer Staples (XLV), and Real Estate (XLRE) sectors were among the outperformers. Homebuilders and the broader Hoya Capital Housing Index were also among the leaders today as the wave of better-than-expected housing data over the past month continued with data showing that Pending Home Sales rebounded last month.

On that point, Pending Home Sales - a leading indicator of the health of the U.S. housing market, rose significantly faster than expected in August, reversing two months of declines. The NAR reported that Pending Sales - which tracks the number of homes under contract to be sold - climbed 8.1% in August to seven month highs with contracts rising in all four regions of the U.S. NAR chief economist noted, “Rising inventory and moderating price conditions are bringing buyers back to the market." The strong report follows a wave of better-than-expected housing data last week as Housing Starts, Building Permits, Existing Home Sales, New Home Sales, and Homebuilder Sentiment all topping expectations.

Equity REITs

Apartments: Fresh data yesterday from Zillow (Z) showed that the pace of rent increases continues to accelerate across the United States as its rent index showed that median rents rose 11.5% in August from a year earlier, with a handful of the top-60 markets seeing rent increases of over 25%. Last week, Realtor.com reported that rents rose to record-highs in August with national rental rates growing by 11.5% from the prior year, the first month of double-digit rent growth on record. Driven by robust demand and limited supply of housing units, rental operators benefited from a substantial increase in market rents across the country and throughout essentially all segments of the sector including apartments and single-family rentals.

Mortgage REITs

Per our Mortgage REIT Tracker, mREITs were mixed today as commercial mREITs gained 0.3% today but remain lower by 1.2% on the week. Residential mREITs declined by 0.6% and are now lower by 1.0% this week. Invesco Mortgage (IVR) declared a $0.09/share quarterly dividend, in line with its previous rate, representing a forward dividend yield of 11.5%. Boosted by 24 dividend hikes across the sector this year, the average residential mortgage REIT now pays a dividend yield of 9.0% while the average commercial mortgage REIT pays a dividend yield of 6.9%.

REIT Preferreds & Capital Raising

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished higher by 0.40% today, on average. Farmland Partners (FPI) slid more than 5% today after it announced that it will convert all shares of its 6.00% Series B Convertible Preferred (FPI.PB) into common stock at a price of $12.75/share. Over in the bond markets today, Life Storage (LSI) priced $600M of 2.40% senior unsecured notes due 2031 while Sun Communities (SUI) priced $450M of 2.30% senior notes due 2028 and $150M of 2.70% notes due 2031.

Economic Data This Week

The busy week of economic data continues tomorrow with Jobless Claims data and Chicago PMI data. We'll see inflation data on Friday with the PCE Price Index - the Fed's "preferred" measure of consumer inflation - which is expected to show another month of above-4% annual inflation in August.

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Disclosure: Hoya Capital Real Estate advises two Exchange-Traded Funds listed on the NYSE. In addition to any long positions listed below, Hoya Capital is long all components in the Hoya Capital Housing 100 Index and in the Hoya Capital High Dividend Yield Index. Index definitions and a complete list of holdings are available on our website.

Additional Disclosure: It is not possible to invest directly in an index. Index performance cited in this commentary does not reflect the performance of any fund or other account managed or serviced by Hoya Capital Real Estate. Data quoted represents past performance, which is no guarantee of future results. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy.

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