The U.S. real estate market is booming. The Wall Street Journal reported that real estate stocks are reaching new highs, and home prices are rising across the United States. Higher prices will spook investors who remember 2008, but many of the factors which caused that crash, such as lower lending standards and excessive house flipping, are not present.
There are certain troubles on the horizon which could spell trouble for the real estate market and the U.S. economy by extension, but I remain convinced that the real estate market will perform well for at least the rest of 2019. Nevertheless, here are some of the key trends, both positive and negative, to watch for in real estate.
Booming Demand for REITs
Real estate stocks and REITs have become popular investment vehicles for investors chasing reliable yields. The 10-year treasury rate has fallen over a whole percentage point compared to last October, and there are strong indications that the Federal Reserve will lower interest rates later this year. With bonds becoming less attractive, REITs become a stronger alternative.
Investors can turn towards REIT ETFs such as iShares US Real Estate (NYSE:IYR) or Schwab (NYSE:SCHH), but an alternative is to look for REITs which specialize in growing fields in the U.S. market. For example, Welltower Inc (NYSE:WELL) is a large REIT which focuses its portfolio on senior housing and healthcare properties, and we know how the healthcare industry will continue to grow as the American population ages. Welltower has seen its stock rise by 45% over the past 12 months while offering a 5.5% dividend.
E-commerce and industrial REITs are other strong sectors which can count on growth. Even retail-based REITs, which may seem like a bad investment due to the decline in physical retail, can be strong value investments depending on the company and location. If you want a reliable yield greater than bonds, real estate stocks are currently a strong investment.
A Strong Economy
The real estate market should be expected to do well because general indicators for the U.S. economy remain positive. There are some disconcerting factors, such as the Fed backtracking from raising interest rates as well as the threat of a trade war. And we should expect a slowdown in growth later in the year which will continue in 2020.
But that does not take away from the fact that unemployment is low, wages are rising, and consumers are willing to spend money on homes. If there is an economic slowdown or even a recession in the next year or two, it will not be remotely as dramatic or catastrophic as 2008.
The Generational Conflict
Finally, no discussion about the real estate market is complete without noting the real generational battle between millennials and older generations. Millennials want to buy property in popular locations such as in cities along the two coasts, which has led to local housing markets going completely haywire. Millennials cannot buy homes because they are not affordable. The Atlantic points out that it would take a millennial making the average wage in Los Angeles 43 years to save up enough money for a down payment
Basic economics dictates that if there is an excess of demand for a product, the supply of the product will increase to meet the demand. But that is not what we are seeing with housing in places like San Francisco or Washington D.C. While there are a variety of factors behind this failure to build, a major factor is that current homeowners do not want housing built which would lower property values and hurt their bottom line.
Other proposals have been floated around in order to combat high housing prices. Rent control is a popular idea with politicians if not with economists. Regulations against foreigners holding houses have been proposed, which might be comparable with the free zone versus freehold property model which exists in Dubai.
The conflict between homeowners and prospective homebuyers could depress sales in the long term, hurting the real estate market and stocks and threatening changes in government regulations on housing. We have growing political pressure in favor of building in the form of the “YIMBY” movement. But in 2019 and 2020, homeowners will continue to have the advantage, boosting prices and stock values.
Overblown Fears
Memories of 2008 are still fresh in many investors’ minds, which means that the slightest twinge in the markets sends people panicking about another real estate bubble or downturn. But the U.S. economy should be expected to do well for the rest of 2019 and much of 2020, and real estate is in an even stronger position. Whether it is homes in California, Amazon (NASDAQ:AMZN) warehouses, or industrial businesses rising, real estate stocks have plenty of room for growth and further dividends.
With bonds in their current dismal state and real estate demand high, REITs are the best place for investors looking for a strong, reliable yield. Pick out businesses and properties in sectors which will continue to stay in demand over the long term, and prepare to reap the rewards.
The U.S. real estate market is booming. The Wall Street Journal reported that real estate stocks are reaching new highs, and home prices are rising across the United States. Higher prices will spook investors who remember 2008, but many of the factors which caused that crash, such as lower lending standards and excessive house flipping, are not present.
There are certain troubles on the horizon which could spell trouble for the real estate market and the U.S. economy by extension, but I remain convinced that the real estate market will perform well for at least the rest of 2019. Nevertheless, here are some of the key trends, both positive and negative, to watch for in real estate.