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Is Housing Slump a Boon for Real Estate ETFs?

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Sales of newly built homes in April logged their biggest decline in nine years, as higher interest rates and high home prices are weighing on buyer demand. New-home sales fell 16.6% in April from March to a seasonally adjusted annual rate of 591,000, the lowest level since April 2020, the Commerce Department said Tuesday.The 16.6% decline was the biggest monthly drop since 2013, per Wall Street Journal.

Meanwhile, existing home sales in the United States fell 2.4% to a seasonally adjusted annual rate of 5.61 million in April 2022, the lowest since June 2020 and slightly below forecasts of 5.65 million. Sales dropped for the third successive month in April, marking a cooling housing market.

Rising mortgage-interest rates have made homeownership more expensive for buyers. The average rate on a 30-year fixed-rate mortgage was 5.25% last week, up from 3.1% at the start of the year, according to Freddie Mac. Due to the Fed’s recent interest rate increases, mortgage rates have risen almost 2.3 percentage points since November to 5.25% last week, marking the steepest rise in a six-month-span in decades.

Plus, due to rising costs and supply shortage, home prices have been on a steady ascent. Economists at Goldman Sachs estimate that housing prices will bounce about 10% this year while Bank of America has forecast a 15% rise, as quoted on Wall Street Journal.

Why Real Estate ETFs Appear Promising

This may open up opportunities for renting. Although rental prices for single-family homes rose 7.8% in 2021 (an all-time high), according to CoreLogic, as quoted on Bloomberg, reduced demand for homebuying means that demand for renting should see some upbeat momentum.

Moderate growth in the economy and rising home prices should translate into greater demand for real estate, higher occupancy levels and landlords’ greater power to ask for higher rents. Additionally, REITs have benefited from inflation concerns as it is often considered a hedge against inflation.

Also, real estate stocks and ETFs offer outsized yields. REITs own and operate income-producing real estate. They are required to distribute at least 90% of taxable income to shareholders annually in the form of dividends and, in turn, can deduct those dividends paid from their corporate taxable income. Thus, REITs offer juicy dividend yields. Further, REITs have a low correlation with other stocks and bonds, thereby providing huge diversification benefits to the portfolio.

Notably, real estate ETFs beat the S&P 500 (down 17%) this year. The sector has been performing better than the S&P 500 (up 0.8% past week) in recent weeks also. Following are the ETFs that topped the S&P 500 this year.

ETFs in Focus

Invesco KBW Premium Yield Equity REIT ETF (KBWY - Free Report) – Down 8.6%; Yields 5.52%

Global X SuperDividend REIT ETF (SRET - Free Report) – Down 8.6%; Yields 6.29%

IQ US Real Estate Small Cap ETF (ROOF - Free Report) – Down 12.6%; Yields 3.07%

Invesco S&P 500 Equal Weight Real Estate ETF (EWRE - Free Report) – Down 13.9%; Yields 2.91%





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