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Why Real Estate ETFs May Turn Around Ahead

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The U.S. real estate sector has been under pressure for quite some time now. However, things have been changing for the better and the losing trend of the sector may shift ahead because of the below-mentioned reasons.

Demand for Renting is High

A Wall Street Journal article recently noted that three million U.S. households making over $150,000 are still renters. The number of renter households making $150,000 or more a year rose by 87% between 2016 and 2021 to more than 3 million, according to five-year estimates from the U.S. Census Bureau.

In Austin, TX, renter households making $150,000 or more soared by 154% over the five-year period, according to an analysis of the census data by researchers at RentCafé, an apartment-listing website, as quoted on the WSJ article.

The Uptick in Home Prices is a Boon for Renters

A high cost of homeownership due to soaring home prices and higher mortgage rates, and a tight housing market drove demand for rental properties. The rental market is actually stronger than the for-sale market right now. This is due to extremely high home prices, which are up nearly 14% year over year. This is a great scenario for renters.

A Volatile Stock Market & Slowing Jobs Market

Amid fast-rising home prices, people needed to have solid income from the equity market, great credit and a job for home ownership. Wall Street was extremely downbeat last year due to rising rates and high inflation. Though the stock market tried to make a strong comeback this year, the regional banking crisis recently shook Wall Street.

There have been heavy job losses, too, in the technology sector. The unemployment rate increased slightly in February. All these uncertainties are likely to keep prospective homebuyers away from ownership and direct them toward the rental market. 

Rising Inflation

The annual inflation rate in the United States slowed to 6% in February of 2023, the lowest since September of 2021, in line with market forecasts, and compared to 6.4% in January. Though inflation is showing signs of easing,the current ratestayed above the Fed's 2% target. In a high inflation environment, real estate stocks act as a good bet. The resale value of a property and rental income rise with price inflation.

Fed May Stay Put This Month

Due to regional banking failures , the Fed may stay put from hiking rates this month. Plus, the banking crisis triggered a flight to safety. Both factors will likely keep the long-term bond yields at a subdued level. Agreed, low rates are beneficial for the homebuilding sector, real estate stocks too perform well in a lower rate environment.

Real Estate a Lucrative Yield Destination

If these are not enough, yield is great for real-estate stocks and ETFs as these are high-yielding in nature. The benchmark U.S. 10-year Treasury yield was 3.55% on Mar 13. Against such a backdrop, dividends offered by real estate ETFs are quite sturdy.

Some of the decent real estate ETFs right now are Hoya Capital High Dividend Yield ETF (RIET - Free Report) (yields 9.35% annually), Invesco KBW Premium Yield Equity REIT ETF (KBWY - Free Report) (yields 7.97% annually), Kelly Residential & Apartment Real Estate ETF (RESI - Free Report) (yields 6.20% annually) and ALPS REIT Dividend Dogs ETF (RDOG - Free Report) (yields 5.41% annually).


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