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US Home Prices Rise: Time to Invest in REITs?

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Home-price gains accelerated in February for the 70th-consecutive month with no sign of slowing down. However, what may be a challenging time for buyers could be the perfect time for investors to  benefit from REITs.

The S&P CoreLogic Case-Shiller National Home Price Index, which spans the entire nation, rose 6.3% in February, up from a 6.1% year-over-year increase reported in January.

According to Wall Street Journal, “The 10-city index gained 6.5% over the year, up significantly from 6% the prior month. The 20-city index gained 6.8%, up significantly from 6.4% the previous month. Economists surveyed by The Wall Street Journal had expected home-price growth to decelerate in February, with the 20-city index gaining 6.3%.”

Seattle housing market still biggest gainer

Seattle posted a 12.7% year-over-year price increase. Las Vegas followed with an 11.6% increase and San Francisco recorded a 10.1% increase.

“Increasing employment supports rising home prices both nationally and locally,” said David M. Blitzer, managing director and chairman of the Index Committee at S&P Dow Jones in a press statement. “Among the 20 cities covered by the S&P CoreLogic Case-Shiller Indices, Seattle enjoyed both the largest gain in employment and in home prices over the 12 months ended in February 2018.”

Challenging Conditions for Buyers But Favorable for Investors

While this may mean challenging conditions for buyers as interest rates rise and inventory remains tight, it could mean something entirely different for investors.

Real estate stocks, including real estate investment trusts (REITs) and the related exchange traded funds, are viewed as rate-sensitive assets. While income investors are weary of the potentially negative effect of higher borrowing costs on rate-sensitive assets, real estate investment trusts and related ETFs may be seen as an alternative income opportunity for yield-minded investors.

US Home Prices Rise: Time to Invest in REITs?

“As we continue to operate in a rising rate environment, investors are considering how to capitalize on these dynamics and generate meaningful returns. One way to do so is by utilizing REIT ETFs, which unlike other real assets provide long term fixed cash flow and the shorter duration end of the market provides lower volatility and lower sensitivity to rising rates,” Martin Kremenstein, Head of NuShares, Nuveen’s ETF business, said in a note.

Investors interested in gaining broad exposure to the dividend-paying REITs can look at ETF options like the Vanguard REIT ETF (NYSEArca: VNQ)iShares Dow Jones US Real Estate Index Fund (NYSEArca: IYR) and Schwab US REIT ETF (NYSEArca: SCHH), among others. Additionally, for those interested in the potential growth of small-cap REITs, investors can look to the targeted IndexIQ US Real Estate Small Cap ETF (NYSEArca: ROOF).

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