Faced with new recession risks in the US, does it make sense to move your portfolio away from real estate funds? A look at some data.
The US economy is going through a crucial moment in its history, characterized by great uncertainty and high volatility, as demonstrated by the record levels of the CBOE VIX index. This context has inevitably led many investors to reflect on the strength of the real estate market, a sector notoriously reactive to changes in some fundamental economic variables. Among these, interest rates play a prominent role, and recent dynamics in the US futures markets suggest that we are at a decisive turning point. How will the Real Estate segment and with it US real estate REITs react to these economic changes?
Interest rates, what does the US market expect?
The futures market has priced in about 3-4 rate cuts of 25 basis points in Treasury futures for 2024, and about 8-9 cuts in 2025. This number is higher than the projections of the ECB, which has already started a process of reducing rates. The current economic phase could represent the last stage of a cycle, in which the Federal Reserve will try to keep the economy in balance through a more accommodating monetary policy, reducing interest rates without any particular surprises.
What to expect from real estate REITs in this macro context?
In the first phase of the cycle (tightening of monetary policy), although the recession has not yet been reached, the real estate sector, and in particular REITs (Real Estate Investment Trusts), showed signs of strong weakness. The decline recorded was surprising for many analysts, especially when compared to previous crises of the century. This is because, although the real estate sector has historically outperformed the stock market (S&P 500), even in periods of rising interest rates, this time the decline was much more marked than was justified by economic fundamentals, and moreover without any economic contraction.
One reason for this weakness may be fear of past events rather than a real deterioration in fundamentals. However, it is important to note that the composition of US REIT debt is better than ever. According to Narit data, over the past decade, real estate trusts have maintained long debt maturities and reduced the impact of interest rates on total debt. This has made them less vulnerable to interest rate shocks than in the past.
So will the recession bring another US housing market crash?
Ultimately, it is not rates that are scaring the market, but the real factor that is fueling investors’ concerns is the risk of a “hard landing” of the economy, a recession. If this scenario were to materialize, it would be natural to expect REIT prices to decline further. In a severe recession, many businesses and consumers may struggle to pay rent, increasing the risk of tenant default and, in turn, putting pressure on REIT revenues.
However, if we look at history, it is precisely during periods of lower rates that the real estate market has often offered interesting investment opportunities. In essence, the REIT market may have already incorporated the recessionary scenario, and, consequently, on this particular occasion, the real estate sector could react positively thanks to the reduction in financing costs following the first rate cuts.
A look at the real estate market charts
Analyzing the chart of one of the most popular ETFs on the market, the XLRE, we can observe that we are approaching a breakout from an accumulation zone. Although we cannot predict with certainty the future price movement of the VNQ (the Vanguard Real Estate ETF), this is a technical indication to take into account when doing your analysis.
Original article published on Money.it Italy 2024-08-16 09:26:00. Original title: Il mercato immobiliare USA è a rischio?
