Why the terrible revision to 1st quarter 2014 affects REITs
Lots of economic data last week
We had quite a few important economic releases last week, but the highlight was the third and final revision to first quarter GDP. We knew that bad weather had impacted GDP already, but GDP was revised downward from -1% to -2.9%. There may have been some Obamacare-related things happening, as healthcare spending was revised downward in a big way.
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We also got some home price data, with the FHFA House Price Index and Case-Shiller reporting that prices are still increasing. But the rate of increase is decelerating. The new home sales data hit it out of the park, coming in at over 500 thousand. This is much higher than Wall Street’s estimate of 439 thousand.
The Markit PMI data was strong as well. Personal income came in as expected. But personal spending was disappointing. Finally, we heard from homebuilders Lennar (LEN) and KB Home as they announced second-quarter numbers.
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 concerned about the low personal spending data. Office REITs like Vornado Realty Trust (VNO) will be cheered by the Markit PMI data, which shows manufacturing and hiring are improving.
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) focused on the earnings reports out of Lennar and KB Home. New home sales and the strong home price appreciation data will certainly comfort them.