REITs vs. Homebuilders -- Not What You Think

Includes: EOP, EQR, XHB
by: Roger Nusbaum

Roger Nusbaum submits: By now you know that Equity Office Property (EOP) is getting taken out. A lot of REITs are lifting in response. There had been chatter that this was a possibility; it has created some heightened excitement and now we will probably see a lot of are-REITs-right-for-you type articles.

My position on REITs has been same for a long time. Most clients own Equity Residential (NYSE:EQR), EOP's cousin, which I first disclosed about a year and a half ago. A few clients less tolerant of stock market volatility own a second REIT.

EQR vs XHB 21 11 06Sometimes I see or hear commentary that lumps REITs in with the homebuilder stocks. This chart of EQR (as a proxy) compared to the Homebuilder SPDR (NYSEARCA:XHB) shows a very low and often negative correlation between the two.

I have never thought there was much of a fundamental connection but you can judge for yourself.

In addition to what I think is a fundamental difference there is also a difference in sentiment. Hot money seems to love to chase the homebuilders while REITs attract more staid capital. REITs, kind of like the Canadian income trusts, can create a false sense of security. REITs have utility and have a place in a diversified portfolio, but too much of anything is not a good idea. REITs had a rough run during the bubble years and they will have rough runs in the future.

Should you have exposure? Probably. But 20%? Not for me.