The real estate sector had a difficult 2018, though from a sector-investing basis it was not as bad as one might have expected.
While the S&P 500 was down 4.38% on a total-return basis, the real estate sector was off 2.2%. However, one of the largest real estate ETFs, Vanguard’s VNQ, was down 5.9%. VNQ has the bulk of its holdings in different categories of REITs.
According to Bankrate, 2018 was a year of conflicting trends for the housing market in the U.S.:
They also point out that in 2018, “Affordability pressures affected demand in 2018, which was compounded by rising interest rates. … After several years of historically low rates, hovering around 3.5 percent, 2018 was the year of the 5 percent mortgage interest rate. Rates hit the 5 percent mark in early October, only to sink back into the 4s in the fourth quarter.”
With the Federal Reserve indicating in early January that the likelihood for further rate increases in 2019 had diminished, mortgage rates have continued to back off from the peak of 2018.
FIGURE 1: 30-YEAR FIXED MORTGAGE RATE—HISTORICAL 10-YEAR CHART
While trends for 2019 in the residential real estate market are still going to be highly variable by geographic market and influenced greatly by the path of interest rates, an analyst at Charles Schwab feels the commercial real estate sector has positive tailwinds in 2019 and upgraded the sector to “market perform.” He cites the following as positive factors for the sector:
On the possibility of a resumption in interest rate hikes, Bespoke Investment Group says,
FIGURE 2: ODDS OF RATE HIKE, CUT, OR NO CHANGE BY JAN. 20, 2020
Source: Bespoke Investment Group
The outlook for the residential market for 2019, according to National Association of Realtors’ (NAR) chief economist Lawrence Yun is for “more of the same, in terms of growth” versus 2018. His outlook calls for combined existing and new home sales “to increase a little less than 1 percent, from 5.97 million to 6.1 million.” There will be disparity between geographic markets and between lower-priced and high-end homes, with demand for more affordable housing being strong. The sales of more-expensive homes are going to suffer on a relative basis from higher inventory and the impact of changes in the tax law, which caps mortgage interest deductions and state and local tax deductions.
Data on new home sales was released for January 2019 last week. Though the report was within consensus expectations, Barron’s called it “a mostly favorable report,” with the three-month average having “the best showing since June.”
The homebuilders’ monthly confidence index was unchanged at a seasonally adjusted reading of 62 in March, according to the release on Monday of the NAHB/Wells Fargo Housing Market Index. While this was somewhat disappointing, the index has rebounded over the past three months from a reading of 56 in December.
Existing home sales for January, however, fell for the third straight month and “hit a 3-year low,” according to MarketWatch’s analysis from late February.
The picture, therefore, remains very mixed for the housing market.
Source: Barron’s, Econoday, Haver Analytics
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