Is the Time REIT for Real Estate ETFs?

As a result of the seemingly endless decline in the U.S. housing market (we're nearing the three year mark for the current downturn), most real estate ETFs on the market have posted huge losses since 2007, with many still down more than 50% from their record highs despite recent rallies.

But as any shrewd investor knows, crisis begets opportunity. With real estate ETFs reaching new lows, the time may finally be right to snatch up some funds at bargain prices.

Signs of Hope...?

After bottoming out earlier this year, many real estate ETFs have staged modest rallies in recent months, but many remain well below their 52-week highs and even further from levels seen prior to 2008.

Despite the recent rallies, there are several reasons why real estate ETFs may continue to rise over the summer months.

• Rising Home Prices: After years of continuous declines, home prices in several major markets, including San Diego, Houston, and Phoenix, are finally reversing course and heading upwards once again.
• Rising Confidence: Builder confidence, as reported by the National Association of Home Builders and Wells Fargo, recently rose 2 points to 16 on the Housing Market Index.
• Improving Consumer Confidence: The Conference Board reported that consumer confidence, a closely watched economic indicator, increased by 12 points in April to 39.2, the highest reading since November. Given the psychological element of real estate activity, a rise in consumer confidence could result in further price increases.

...Or Just a Mirage?

Before you get too optimistic, there's plenty of bad news to consider as well:

• Construction Slows: Construction of homes and apartments fell to a seasonally adjusted rate of 458,000 in April, the lowest pace in nearly 50 years.
• A Long Way to Go: Despite the aforementioned increase in builder confidence, the indicator remains at 16 on a 100 point scale, well below the 50 point crossover point between optimism and pessimism.
• Weak Commercial Activity: The National Association of Realtors reported recently that the U.S. commercial real estate sector declined in the first quarter of 2009, with brokerage activities falling 4.8% from the fourth quarter of 2008.

Overall, uncertainty about the sustainability of recent positive developments continues to weigh on real estate ETFs. If these gains reverse, we could see real estate investments plunge again.

But if we have indeed bottomed out, real estate ETFs are worth keeping an eye on in the coming months.

Abundance of Options

For those who believe the real estate market is poised for a comeback, there are several options that provide market exposure. A few of these funds are highlighted here:

• Vanguard REIT ETF (VNQ): This ETF is designed to track the performance of the MSCI U.S. REIT Index, a benchmark of U.S. property trusts that covers about two-thirds of the U.S. REIT market.
• iShares Dow Jones U.S. Real Estate Index (IYR): IYR tracks the diversified Dow Jones U.S. Real Estate Index. This index holds a number of REITs with interests in a wide variety of real property, including shopping malls, storage facilities, residential properties, and timber.
• SPDR DJ Wilshire International Real Estate (RWX): This State Street fund offers exposure to real estate markets throughout the world. In addition to U.S. real estate (43% of fund holdings), IYR holds assets in Japan (12%), Australia (8%), and the UK (8%). RWX has outperformed the majority of U.S.-only real estate ETFs over the past year.
• ProShares Ultra Real Estate (URE): URE is a leveraged ETF, meaning that it is generally inappropriate for buy-and-hold investors and is primarily used by day traders. For sophisticated investors looking to generate a quick intraday profit, URE may be a useful tool. Given the frequency with which important real estate related information is released (new construction, median home prices, etc.) real estate indices often experience significant one-day movements that can be exacerbated with leveraged funds.

Disclosure: No positions.

Comments

[malach hamo...:]

the REIT ETFs have already enjoyed a major rally. Any further advance would need a real show of strength in the economy - office jobs, retail spending, unemployment - before rents firm. There is also an overhang on the entire real estate world of the billions of commercial mortgages that need to be refinanced over the next few years; many of these loans were made at higher loan-to-value ratios on top of inflated property valuations and will need fresh equity infusions or be foreclosed. A rash of commercial properties loosed on the market will drive down all values, including publicly traded REITs.

May 21 06:32 AM

[Alan Young:]

This is horrible advice!
You can't use HOUSING statistics to make REIT investment decisions. REIT indexes are dominated by commercial RE (mostly retail and office), which has an entirely different set of issues. Consumer confidence and housing stats will not help!

May 21 09:26 AM

[David Frankel:]

I agree with Alan, housing is only one part of the puzzle. With all the downsizing I'm sure there's going to be less of a demand for office space driving rent down and in turn REITS

May 21 10:28 AM

[Michael Joh...:]

@ Alan Young
Alan - you make a good point but I think you misinterpreted this article as a ringing endorsement for buying real estate ETFs. As I pointed out, there's still a lot of bad news out there, particularly with respect to the commercial sector. I'm trying to lay out some of the arguments on both sides of the aisle.

I also respectfully disagree that consumer confidence is irrelevant. Given that retail REITs comprise a large portion of real estate ETFs, increased spending (which results from increased confidence) is definitely meaningful.

May 21 12:34 PM

[H.J. Huneycutt:]

I've been buying into REITs, but I'm not as crazy about the ETFs. I'm sure they'll probably go up a bit over time, but there are lots of good REITs out there and lots of bad REITs. I'd rather find the good ones and leave the bad ones alone.

May 21 02:05 PM

[Jay:]

I don't think Alan misinterpreted your article. REITs are almost entirely devoted to commercial real estate. Citing residential house prices, housing starts, and an NAR-based comment on commercial real estate is either ignorant or disingenuous, and yields essentially no insight to someone trying to value REITs.

In my humble opinion :)

On May 21 12:34 PM Michael Johnston wrote:

> @ Alan Young
> Alan - you make a good point but I think you misinterpreted this
> article as a ringing endorsement for buying real estate ETFs. As
> I pointed out, there's still a lot of bad news out there, particularly
> with respect to the commercial sector. I'm trying to lay out some
> of the arguments on both sides of the aisle.
>
> I also respectfully disagree that consumer confidence is irrelevant.
> Given that retail REITs comprise a large portion of real estate ETFs,
> increased spending (which results from increased confidence) is definitely
> meaningful.

May 21 04:27 PM

[utilitus:]

Using more instinct than expertise, I've been building a pretty big position in the Alpine product AWP. It's not a REIT but closed end fund, mostly holding international securities in "a favorable balance among three pillars of real estate value – Premier Property Owners, Premier Property Developers, and Premier Property Financiers/Investors.". It is flexibly currency hedged, a key point given my dire view of the US$, and RE is of course an inflation play. It was down maybe 90% since it's ill-timed introduction in 2007, and I'm up about 60% in several months while its' yeild has devolved from 15% to 8.5% now. Recently, it's behaving rather well on down days.

May 21 06:33 PM

[carey_jim:]

Inverse REIT ETF's maybe.

May 22 02:30 AM