Strong economic data, especially in the manufacturing sector
We saw some important manufacturing-related data on Wednesday, with industrial production, manufacturing production, and capacity utilization all coming in better than expected. The most interesting part was not so much the headline numbers, but the revisions to February, which were gargantuan. Certainly any theory that the January slowdown was something other than weather-related weakness was dismissed on Wednesday. If anything, it’s looking like the economy is accelerating.
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Housing starts were weak, however
Housing starts were weaker than expected and have been well below where they usually are at this part of the economic cycle. That said, this isn’t a normal recovery because the Great Recession was not a garden-variety recession, but the response to a residential real estate bubble. As the economy improves, sub–1 million deliveries will be insufficient to meet demand.
We heard from KB Home (KBH) and Lennar (LEN) recently. Both reported strong numbers, and average selling prices continue to rise. The homebuilding segment has definitely been a case of two sectors—the luxury sector, which is doing extremely well, and the first-time homebuyer sector, which is getting bombarded by increasing real estate prices, rising interest rates, and a lousy job market. The homebuilders could very well find themselves caught flat-footed when the first time homebuyer returns. There is a tremendous amount of pent-up demand.
Commercial REITs will be encouraged by economic strength
Commercial REITs in the retail space like Simon Property (SPG) and General Growth Properties (GGP) will certainly take comfort in the initial jobless claims report, and the manufacturing data which signals jobs growth. This will undoubtedly be good news for office REITs like Boston Properties (BXP) and Vornado (VNO).
Implications for mortgage REITs
Mortgage REITs, like Annaly (NLY) and American Capital (AGNC), are driven by interest rates, which have been in a tight trading range. Investors are becoming more comfortable with the idea that the Fed isn’t looking to raise rates too soon (people seem to have digested the possibility, although probably unlikely, that the Fed will start hiking rates at the June 2014 FOMC meeting).