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Here’s Why a Rally in Real Estate ETFs is Likely Ahead

The U.S. homebuilding sector is on fire. Thanks to extremely low mortgage rates, home sales are upbeat. But higher demand for home buying as well as lack of labor and land has boosted home prices. The median home sale price rose 15% year over year to $320,625 — the highest on record, according to a new report from the technology-powered real estate brokerage Redfin. The largest increase ever recorded in the Case-Shiller national home price index (which goes back through 1988) was 14.5% in September 2005.

Inside the Details of Rising Home Prices

In the week ending Oct 4, home prices shot up 16% from the same week a year earlier. Since the four-week period ending Jul 5, home prices have grown 6.8%. On the contrary, over that same period in 2018 and 2019, prices dropped an average of 4.4%. During the four-week period ending Oct 4, the median asking price of new listings was up 14.0% from a year earlier, marking an increase from 12.9% during the four weeks ending Sep 27.

Uptick in Home Prices is a Boon for Renters

Along with some analysts, we too believe that fast-rising home prices are likely to keep prospective homebuyers away from the ownership and direct them toward the rental market. “Homeownership is still dead in this country because the only people that are buying homes right now are people that have equity, great credit and a job,” multi-family housing investor Grant Cardone told Yahoo Finance, per an article.

Home prices usually decline in the fall, but the aforesaid pricing details indicate that they is hovering around summer highs. Meanwhile rent prices fell this summer. The national median rent price for a one-bedroom apartment was down 0.1% from last month to $1,231 according to Zumper, following a summer when rent prices were stuck.

Meanwhile, busy lenders have tightened requirements and kept mortgage rates a bit higher to slow the approaching gush of mortgage and refinance applications.  This is yet another reason why the homebuying spree may slow and the real estate market could grow.

The job market is still far from steady. The coronavirus fears are also not subsiding anytime soon. This means demand for real estates for the rent purpose is likely to remain strong from middle-income or low-income consumers.

Real Estates Are Lucrative Amid a Low-Yield Environment

If these are not enough, a low-rate environment is great for real estate stocks and ETFs as these are high-yielding in nature. The benchmark U.S. 10-year treasury yield was 0.79% on Oct 9. Against such a low-yield backdrop, dividends offered by real estate ETFs are quite sturdy.

Some of the decent real estate ETF plays right now are Real Estate Select Sector SPDR ETF (XLRE) (yields 2.97% annually), PPTY U.S. Diversified Real Estate ETF PPTY (yields 3.84% annually) and VanEck Vectors Mortgage REIT Income ETF MORT (yields 11.62% annually). These ETFs have a Zacks Rank #3 (Hold). The trio has gained 2.7%, 0.9% and 2.6%, respectively, in the past one month.

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VanEck Vectors Mortgage REIT Income ETF (MORT): ETF Research Reports

Real Estate Select Sector SPDR ETF (XLRE): ETF Research Reports

PPTY U.S. Diversified Real Estate ETF (PPTY): ETF Research Reports

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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