The real estate sector has been the bearer of good news lately, which has enabled it to gain some of the ground that it lost over the past two years.
In the month of August, residential construction rose by 4.7% to an annualized rate of $249.5 billion. Although still down nearly 25% on a year-over-year basis, the trend is a positive one. To add to the construction numbers, there have been talks between lawmakers and the White House to extend the expiration of the $8,000 first time home buyer tax credit and possibly even expand the credit to current homeowners.
In regards to supply and demand forces in the sector, the inventory of existing homes has slowly been trending down and there is now close to 8.5 months of supply on the market. As for new homes, in absolute terms, inventories are at a 27-year low.
In addition, mortgage rates continue to drop to highly favorable levels. Most recently, a 30-year fixed mortgage was below 5%. This makes home ownership a bit more affordable and attractive to first time homebuyers who have been waiting for the perfect time to buy.
Although there are plenty of indicators that real estate is trending upwards, it is important to keep in mind other economic indicators which are unfavorable to the sector. First, there is unemployment. The unemployment rate hasn’t stabilized yet and continues to grow. Secondly, consumer confidence in the overall health of the economy is still extremely shaky, steering consumers away from making big purchases. Lastly, foreclosure rates are elevated which will put further strain on the sector.
Whether an investor is optimistic or pessimistic about the prospects of real estate, ETFs provide a means to play the sector. From a long perspective, one can take a look at the iShares Dow Jones US Real Estate (IYR) ETF, which gives exposure not only to residential real estate, but commercial as well. Another option is the SPDR S&P Homebuilders (XHB)ETF, which provides exposure to home furnishing companies like Bed, Bath & Beyond or Williams Sonoma.
To short the sector, the UltraShort Real Estate ProShares (SRS) ETF is a good option with an expense ratio of 0.95% and a yield of 0.18%.
