The leading measure for residential property, the S&P Case-Shiller Home Price Index, pointed to 4.3% year-over-year gains in the 12 months ending last October. Clearly, prices have stabilized. That said, can consumers genuinely contribute to a longer-lasting real estate recovery?
For example, I recently purchased a 2nd property. My credit scores were phenomenal. The loan-to-value (LTV) at 50% was attractive. And Congressional leaders argue over whether or not the taxes that I pay on my income is fair. In other words, it should be exceptionally easy for me to qualify for a mortgage on a second home.
Truthfully, it turned out to be an exhaustive procedure. The scrutiny was intense. (I might have preferred a root canal.) And while I did get the loan that I sought, I couldn’t help but wonder how restrictive the process is for consumers of any residence - primary, secondary or investment.
The housing market may indeed be improving. On the flip side, I assume that mortgages are still a bit of a challenge for most consumers. What’s more, price gains have not eliminated delinquent owners or folks who remain “upside down.” The net effect may be an ongoing boom in the residential rental market.
There were 16 million residential rentals in 2010 and roughly another 5 million foreclosures that may become investor-owned rentals. According to KBW analysts, approximately 15% of bank-owned properties are being acquired by real estate investment trusts engaged in REO-to-rental residential real estate.
Investors with the stomach to invest in individual REITs might take a look at Altisource Residential (RESI) or Silver Bay Realty Trust (SBY). However, ETF investors will have to wait if they hope to gain diversified exposure to companies engaged solely in the single-family residential rental arena.
For those who do not wish to wait for that day, there is an ETF that might demonstrate a high correlation with single-family rental REITs over time. The iShares FTSE NAREIT Residential Plus Fund (REZ) tracks an index that generally invests at least 90% of its assets in securities that represent the performance of the residential, healthcare and self-storage real estate sectors. Index components are primarily REITs.
Much like the broader equity markets themselves, REZ is trading near 52-week highs. One might be advised to wait for REZ to pull back to its 50-day moving average before committing new dollars.
Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.