Homebuilders And REITs Shrug Off Geopolitics

Jul. 13, 2018 9:37 PM ETAMH, AMZN, CBL, CCI, DLR, EQIX, FSHOX, PEAK, HD, HR, INVH, ITB, IYR, KIM, NSA, PRET, PLD, REM, SBRA, SPY, VNQ, VNQI, WELL, WMT, XHB, SCHH, RWR, USRT, FRI, FREL, ICF, XLRE, KBWY, REZ, ROOF, PPTY, NURE7 Comments

Summary

  • US equities jumped nearly 2% this week as trade and geopolitical tensions eased following reports of constructive meetings with NATO and the UK. Homebuilders climbed 1%.
  • REITs held steady ahead of earnings season, which kicks off next week. The sector has climbed into positive territory YTD as fears over rising rates and inflation have subsided.
  • Fueled by rising oil prices, consumer prices are rising at the fastest rate since 2012. Core CPI and PPI in June, however, were roughly in line with expectations and inflation expectations remain.
  • Evidence of broad-based strength in the labor markets continues to show across nearly all metrics. The rate of hiring increased to the fastest rate since 2015 according to JOLTS data.
  • The rate of voluntary quits continues to rise, a sign of increased labor market dynamism and indicating that workers are more confident about their financial situation. Layoffs are near record-lows.

Real Estate Weekly Review

real estate weekly review

After reaching a fever-pitch last week with tit-for-tat tariff announcements between the US and China, geopolitical and trade concerns eased this week following reports of a productive and constructive European tour by the Trump Administration. The S&P 500 (SPY) jumped nearly 2% as equity markets cheered the nomination of Brett Kavanaugh to the high court, who has a demonstrated record of scrutinizing government overregulation on businesses. Inflation and JOLTS data also suggested that the "Goldilocks" economic environment of solid growth and modest price pressure appears to be continuing in 2018.

The REIT ETFs (VNQ and IYR) finished the week modestly lower ahead of earnings season, which kicks-off next week. The 10-year yield held steady as oil prices (NYSEARCA:USO) retreated following Libya announced it will re-open oil ports following a two-week hiatus. Homebuilders, (XHB and ITB) meanwhile, climbed 1%.

real estate performance

(Hoya Capital Real Estate, Performance as of 2pm Friday)

In other areas of the real estate sector, mortgage REITs (REM) finished the week lower by roughly 1% while international real estate (VNQI) finished lower by 1.5%. The Hoya Capital Housing Index, which tracks an average of residential REITs, homebuilders, homebuilding products, financing, and home improvement retailers, climbed 0.5%, powered by strength in the home improvement sector.

Real Estate in the News

Earnings season kicks off next week in the real estate sector with industrial REIT Prologis (PLD) and cell tower REIT Crown Castle (CCI) set to announce earnings on Tuesday and Wednesday, respectively. In our 1Q18 Earnings Recap, we discussed that REIT metrics appear to have bottomed in 2017. Same-store NOI growth rose 2.5% on a TTM basis. Dividends and FFO/share improved in 1Q18 but remain modestly lower YoY. Fundamentals are showing signs of improvement across most sectors, reversing a downtrend that began in late 2016. Resilient demand has buffered

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