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Summary

  • Week in and week out, whatever the real estate data point, the news has been bad.
  • Yet real estate relative securities mostly rose last week despite the bad news on another critical catalyst, lower long-term treasury yields.
  • Many factors will come into play in the coming months, and the tone may change because of the changing dynamics.

It does not matter the report, whatever has hit the news wire, it has all been bad news for U.S. Real Estate. From New Home Sales to Existing Home Sales, from Housing Starts to Pending Home Sales, whether it's the mortgage application data or even the home price reports, it's all been bad. Every single bit of it has been bad, save for a glimmer or a side note within otherwise depressing data. And yet, real estate relative securities mostly gained last week. I think I know why.

Day in and day out, with each passing week, all the news has been bad. Let's examine the latest of it in last week's housing data.

Report

Prior Result

Expected

Latest Data

Pending Home Sales (Feb.)

94.7

93.9

MBA Mortgage Applications (Weekly)

+0.2% ((NYSE:R))

-3.5%

New Home Sales (Feb.)

455K

440K

440K

Case-Shiller HPI (Jan.)

+0.8%

+0.7%

+0.8%

FHFA House Price Index (Jan.)

+0.7%

+0.4%

+0.5%

  1. R signifies revised

Pending Home Sales were reported for the month of February last week. The Pending Home Sales Index is a measure of contract signings in the existing home market. It's therefore a leading indicator for the largest and most important segment of the residential real estate market. Unfortunately, it forewarns of trouble in future existing home sales of approximately four to six weeks from now, or for the existing home sales data for March and April. It is true that the month of February was brutal for the Northeast and Midwest weather wise, so the report will garner even closer scrutiny next month and the month after as the weather improves. Still, for those who have been desperately waiting for signs of a strong spring selling season, their reward has only been more anxiety thus far.

Each week, when the latest mortgage application data reaches the wire, it seems to show further declines. Last week's report (see link above), covering the period ending March 21, indicated a 3.5% reduction in mortgage applications against a revised prior period. Though one of those glimmers of hope squeezed through the darkness in this too often poor data point. Purchase applications, which measure applications for the purchase of homes (it's what we're watching closely), actually rose by 3.0%. Is spring blooming? The Refinance Index dropped 8%, though, on higher effective mortgage rates in the week measured. It may be that rising rates on those most recent FOMC Fed Funds forecasts and the fear of God put into prospective home buyers' hearts by their real estate brokers pushed a rush into purchase applications during the period measured. We'll probably know for sure next week, because long rates declined last week on what I believe was flight to quality driver (Russian troops building on Ukraine border).

The New Home Sales Report (see link above) is the one most noted by those who loosely follow the real estate sector. In reality, it's far less important than the existing home sales data, due to the proportion of total home sales it accounts for. Also, Housing Starts leads the data and offers better insight into activity as do Purchase Applications. Still, it's very important to a group of companies that sell those new homes and the investors who hold their shares. In the latest report, New Home Sales sank to sad levels, dropping to a pace of 440K in February, down from 455K in January. The more revealing news about the sad state of housing came in comparison to last year's period; sales were down 1.1% from last February, and that is not indicative of a steadily recovering housing market. It would seem that leading the slide was the weather beaten Northeast, which saw sales drop 32% from January and 34% from last February. Take note, however, that the Northeast is far more developed than the rest of the nation, and so its proportion of total new home sales is much less than the West, Midwest and South. The South grew sales over last year, but the West saw a 27.5% drop, and was the real catalyst behind the decline.

Home prices reflect the health of the market. While prices were shown to have increased again in the latest reports, they are increasing at a decreasing rate over time. These are new homes we are speaking about, so they are not directly affected by foreclosures and distressed sales, though the market is affected and so they are affected indirectly in appraisal values. Of course, builders choose markets carefully for new construction and seek areas where they can attract a higher price. Please note that the data measures January, and is therefore less useful than we would like it to be.

Real Estate Security

Last Week

YTD

TTM

DirexionShares Daily Real Estate Bull 3X (NYSEARCA:DRN)

+1.2%

+27.6%

NA

DirexionShares Daily Real Estate Bear 3X (NYSEARCA:DRV)

-1.6%

-25.2%

-25.2%

iShares Industrial/Office Real Estate (NYSEARCA:FNIO)

Unch.

+9.4%

+1.9%

First Trust S&P REIT Index (NYSEARCA:FRI)

+0.5%

+8.7%

-0.2%

iShares Real Estate 50 (NYSEARCA:FTY)

+0.4%

+7.2%

-3.7%

iShares Cohen & Steers REIT ETF (NYSEARCA:ICF)

+0.8%

+9.2%

-1.0%

iShares U.S. Real Estate ETF (NYSEARCA:IYR)

+0.1%

+6.7%

-3.2%

PowerShares KBW Premium Yield Equity REIT ETF (NYSEARCA:KBWY)

Unch.

+4.5%

-5.0%

PowerShares Active U.S. Real Estate ETF (NYSEARCA:PSR)

+0.4%

+7.3%

-0.5%

ProShares Short Real Estate ETF (NYSEARCA:REK)

-0.5%

-8.0%

-4.9%

iShares Mortgage Real Estate ETF (NYSEARCA:REM)

-1.5%

+5.5%

-22.3%

iShares Residential Real Estate ETF (NYSEARCA:REZ)

+0.7%

+10.1%

-3.8%

IQ U.S. Real Estate Small Cap ETF (NYSEARCA:ROOF)

-2.1%

+3.6%

-5.0%

The securities here offer a comprehensive list of investment options to invest broadly in the real estate sector. One is a bearish security, and so you see the negative correlation to the long bets on real estate. If you feel the latest trend of data is an important foreboding warning about the future, that's your vehicle to hedge against your long real estate portfolio or to bet against real estate. Some securities here are levered bets, and so the exaggerated performance. If you strongly believe the latest data is misleading due to the weather, or meaningless ahead of a strong spring selling season, then this may be your vehicle to leverage that. If you don't want too much leverage, or to invest in a specific sector of the market like small cap or builders or commercial or other, then one of the other securities should serve you well.

Why Real Estate Relative Securities Rose Last Week

Most of the securities listed above increased in value last week, which I believe is due to another important element in real estate investment. Despite the Fed's expectations for a higher Fed Funds Rate in 2015, Treasury Yields, especially on the long-end of the spectrum, declined last week. The 10-Year Treasury fell 6 basis points before rising on Friday due to the near and present danger presented by Vladimir Putin (I suggest you see my articles, starting with this one, which links to the others). The 30-year yield, which is tied to mortgage rates, dropped six basis points right through Friday. Obviously, lower mortgage rates, which I expect the MBA data will show in this week's report, are good for real estate investment. I'll let you in on a little secret here in closing. I'm expecting a better than expected spring selling season this year, so despite the bad news, I'm looking for a change in tone and trading trend. Please follow along for my regular coverage of the real estate sector, as I'll have more to say on the subject soon.

Source: U.S. Real Estate - All The News Is Bad