Real Estate Outperforms As Rent Inflation Heats Up

May 11, 2019 10:00 AM ETINVH, ITB, IYR, LII, RITM, OSTK, RDFN, RESI-OLD, REZ, HOUS, RMAX, RP, VNQ, WELL, XHB, Z, ICF, FRI, FREL, XLRE, ROOF, RWR, SCHH, PPTY, NAIL, HOMZ, HOML, SRVR, RTL-OLD1, INDS, PSR, REM, MORT, REIT.IND, REET, KBWY, SRET20 Comments

Summary

  • The ongoing trade spat between the US and China sent the S&P 500 and Nasdaq lower by more than 2%, the worst week of 2019 for the major averages.
  • Domestic-focused real estate equities generally outperformed on the week, lifted by inflation data that suggested that ‘Goldilocks’ economic conditions persist. Trade disputes, however, threaten to upset this delicate balance.
  • CPI data came in cooler-than-expected. Besides housing costs, inflationary pressures remain muted. At 3.8%, rent rose at the fastest rate since mid-2017, powered by tight supply and strong household formations.
  • Strong earnings results from Zillow and Invitation Homes were highlights of the final week of peak earnings season across the REIT and housing sectors. Results were generally better-than-expected.
  • Labor markets remain relentless. JOLTs data showed that job openings rebounded better-than-expected in March, the biggest gain in a year. There are 1.3 million more openings than unemployed Americans.

Real Estate Weekly Review

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The major US equity indexes delivered their worst week of 2019 after a new curveball was thrown into trade discussions between China and the United States with the implementation of new 25% tariffs on $200 billion of Chinese goods. REITs (VNQ and IYR) were among the best-performing equity sectors on the week, ending the week lower by roughly 1%, just the third down-week in the past eighteen weeks. Helping to boost the yield-sensitive sectors of the equity market, cooler-than-expected inflation data pulled down the 10-year yield to the lowest level since early April as economic data continues to indicate ‘Goldilocks’ economic conditions of low inflation and solid growth persist. As it did last year, however, trade disputes and rising energy prices once again threaten to upset this delicate balance.

real estate weekly

On the week, the Hoya Capital US Housing Index, an index that tracks the performance of the broader US residential housing industry, dipped 1.9% after closing at new 2019 highs last week. The domestic-focused Residential REITs (REZ) and Homebuilders (XHB and ITB) were the relative outperformers, but trade tensions weighed on the three sectors more reliant on imported goods: Homebuilding Products, Home Improvement Retail, and Home Furnishings. Zillow (Z) surged more than 6% on the week after reporting earnings, but it wasn’t enough to offset weak performance across the rest of the Real Estate Technology and Brokerage sector from Redfin (RDFN), RE/MAX (RMAX), RealPage (RP), and Realogy (RLGY). Overstock (OSTK), Lennox (LII), Welltower (WELL), and New Residential (NRZ) each climbed by more than 1%.

HOMZ

Earnings season wrapped up this week in the REIT and housing sectors, highlighted this week by strong results in the single-family rental sector with reports from Invitation Homes (INVH) and Front Yard Residential (RESI). Results generally topped estimates across the

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Disclosure: I am/we are long OSTK, Z, LII, WELL, NRZ, CUBE, MAA, COST, SSD, NVR, RDFN, RMAX, RP, RLGY, INVH, ACC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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