Real Estate ETFs May Not Be As Stable As You Think
By Kevin Grewal
Over the past year, the real estate sector has been on somewhat of a roller coaster ride as the federal government has poured billions dollars worth of incentives its way to add stability; however, recent data indicates the sector is far from being stable.
Most recently, the Commerce Department indicated that new home sales slumped to an all-time low and the National Association of Realtors stated that sales of previously owned homes unexpectedly dropped 7.2% in January, after witnessing a record decline in the month before. This resulted in overall pending home sales to see a decline of 7.6% in January.
Despite the extension of government funded programs like the first-time homebuyer tax credit, factors such as a weak job market, stricter lending standards, higher fees charged by lenders and an overall weak consumer sentiment over the health of the economy are taking its toll on the sector.
The Federal Reserve has pushed lending rates to near record lows, but many are unable or unwilling to make use of these rates. In fact, a recent study indicated that new refinance applications were at their lowest levels over the past year. The primary reason behind this is that homeowners just can’t get refinancing because they have negative equity in their homes and no collateral to back the value of their homes and the pain of falling home values doesn’t seem to be easing.
Additionally, as loan delinquencies skyrocketed over the past 18 months, lenders, like Freddie Mac, have started to charge high fees to refinance or obtain new loans. In some cases, these fees can reach as high as 1% of the total loan amount. This low interest rate, high fee environment has deterred homeowners from seeking refinancing.
To make things even more challenging, the Fed plans on ending its purchase of mortgage-backed securities program later this month, which will likely result in an increase in overall borrowing costs. In addition to the woes seen on the borrowing front, increases in foreclosures, which saw a 15% jump in January from a year earlier, are likely to have a negative impact on home values and the overall sector.
At the end of the day, it appears that the underlying demand in the housing market is much weaker than expected and the only way to fix this is through the stabilizing of the labor markets. It is awfully difficult to obtain a mortgage, or better yet, keep paying a current mortgage, without a job.
Some ETFs that are likely to be directly or indirectly influenced by the real estate sector include:
- SPDR S&P Homebuilders (XHB), which closed at $16.26 on Thursday.
- UltraShort Real Estate ProShares (SRS), which moves in the inverse direction of the real estate sector. SRS closed at $7.15 on Thursday.
- iShares FTSE NAREIT Mort Plus Cp Idx (REM ), which holds 52 companies that are involved in lending. REM closed at $14.98.
When investing in these ETFs, in addition to overall macroeconomic factors it is equally important to keep in mind the inherent risks they carry. To help mitigate these risks, it is important to implement an exit strategy which triggers price points at which an upward trend could potentially be coming to an end and enable one to preserve equity.
According to the latest data at www.SmartStops.net, an upward trend in the mentioned ETFs could come to an end at the following price points: XHB at $15.11; SRS at $6.86; REM at $13.24. These price points change on a daily basis as market conditions fluctuate and updated data can be found at www.SmartStops.net.