ETF Talk: Is Real Estate Really the Land of Opportunity?
It remains to be seen whether a tepid recovery of the housing market now starting to take shape can be maintained. The good news for investors is that there are two exchange-traded funds (ETFs) that allow you to play the real estate market whether you are an investor with a positive outlook, or a more negative view.
The table below shows the top ten holdings of the Dow Jones U.S. Real Estate Index. This is the same index used by both of the ETFs that I am featuring today.
If you have a positive outlook on the real estate sector, you may be interested in the iShares Dow Jones U.S. Real Estate Index Fund (IYR). The fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the real estate sector represented by the Dow Jones U.S. Real Estate Index.
If your view of the real estate sector is pessimistic, and/or if you think that the recent signs of improvement are shaky, then you should consider the ProShares UltraShort Real Estate Fund (SRS). This fund seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the Dow Jones U.S. Real Estate Index. In other words, if the index falls by 4%, the ETF is designed to rise by 8%.
Despite rising U.S. unemployment and reduced consumer confidence, the housing market has been showing signs of a slow recovery this year. New-home sales are up 30% since bottoming in January, and this improvement appears to have swayed builders enough to increase construction modestly. In addition, existing-home sales, year over year, were 9.2% higher last month than the level in September 2008.
Aiding this growth is low mortgage rates. In fact, the average 30-year mortgage rate dipped to 5.06% in September, down from 5.19% in August.
Demand for previously owned homes rose in September, as buyers took advantage of reduced prices and an $8,000 tax credit that is in place until the end of next month. The credit has worked so well that key Senate Democrats are preparing legislation to extend the tax credit into 2010.
Amid fears that the credit won’t be extended, some buyers rushed to the market in September to use the subsidy before it ends. This has led some to believe that the improved sales figures for September are inflated and do not reflect true market demand.
However, declining mortgage rates, along with word that a government tax-credit program for first-time homebuyers could receive an extension, likely helped to boost the share prices of homebuilders. Lennar (LEN) appeared to lead the pack, with its shares jumping 9% in early October, after news reports surfaced about the proposed extension of the tax credit.
The New York Times is reporting that lawmakers are working with the White House on a plan to extend the tax credit and also to make it available to current homeowners, rather than just first-time home buyers. Not only would such legislation continue the program, but it would expand its scope. Such action could lift the share prices of homebuilders and residential construction firms.
On the other hand, the National Association of Home Builders’ gauge of confidence in new-home sales fell for the first time in four months. All three key components in the National Association of Home Builders’ report slipped: current sales conditions; traffic of prospective buyers; and sales expectations over the next six months. Even though the latest data showed home sales rose 30% through August, since bottoming in January, a reason could be the $8,000 tax credit for first-time home buyers enacted by Washington last winter to spur the economy.
In addition, the Federal Reserve’s latest findings reflect concerns about commercial real estate. The Fed described commercial real estate as one of the weakest sectors across all of its districts due to a lack of credit availability.
Although some signs point to stabilization in residential real estate, a complete recovery is unlikely any time soon. Clearly, the near-term future of real estate remains murky. But if you are confident about its direction one way or the other, the two ETFs that I identified could offer you a chance to cash in. Remember, though, that this sector is very volatile, so I recommend that you proceed with caution.
For those of you who want advice about which ETFs to buy and sell, check out my ETF Trader service by clicking here. As always, I am happy to answer your questions about ETFs. To send me a question, please click here. You may just see your question covered in a future ETF Talk.
Jim Woods is a 30-plus-year veteran of the markets with varied experience as a broker, hedge fund trader, financial writer, author and newsletter editor.
His books include co-authoring, “Billion Dollar Green: Profit from the Eco Revolution,” and “The Wealth Shield: How to Invest and Protect Your Money from Another Stock Market Crash, Financial Crisis or Global Economic Collapse.” He’s also ghostwritten many books and articles, as well as edited content for some of the investment industry’s biggest luminaries. Read more about Jim Woods.
