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Why real estate investors should focus on overseas events

Part 2
Why real estate investors should focus on overseas events (Part 2 of 6)

Why the latest jobs report was anticlimactic but affected bonds

Last week had some important economic reports

Last week had some critical economic reports, with the ISM data and then the jobs report. Bonds had a bit of a head fake to deal with, as ISM corrected the manufacturing report twice. The first report had it well below expectations, then the revised number had it well above expectations, and then finally corrected to the actual number—which was more or less in line with expectations. The bond market lurched this way and that on the number.

ISM PMIEnlarge Graph

Finally, on Friday, we had the jobs report, which matched street expectations. Bonds didn’t react at all on the news, which was that payrolls increased 217,000 and the unemployment rate was flat at 6.3%. The labor force participation rate still remained at lows we haven’t seen since the late 1970s.

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 be happy with the ISM reports, which showed manufacturing and services doing well. Office REITs like Vornado Realty Trust (VNO) will focus on the jobs report, as job creation is necessary for them to start lowering vacancy rates.

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 it’s probably unlikely, that the Fed will start hiking rates at the June 2015 FOMC meeting).

Implications for homebuilders

Homebuilders like PulteGroup (PHM) and D.R. Horton (DHI) were most interested in Toll Brothers’ earnings report, which showed the luxury end of the market continues to perform well. For investors who were hoping for a big jump in homebuilding and seeing housing starts close to normalcy (starts around 1.5 million units per year), it looks like 2014 isn’t going to be the year that jump happens.

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