The Fed’s end of quantitative easing affects REITs and builders



Last week’s highlights for mortgage REITs

Last week was all about the FOMC meeting for mortgage REITs. The Fed maintained the target federal funds rate and ended quantitative easing, as it previously said it would. For REITs, this means more access to MBS, which is a good thing. We also heard from American Capital Agency (AGNC), a major mortgage REIT that maintained its dividend and went to a monthly distribution format.

Hourly Earnings

A mixed bag for commercial REITs.

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Commercial REITs in the retail space, such as General Growth Properties (GGP), focused on General Growth Property’s (GGP) earnings, which were generally good. The personal income data was also relatively good, even though the headline number for spending fell. Personal spending fell because gasoline prices dropped, so the number fell for a good reason. We’re heading into the all-important holiday shopping season.

Office REITs, such as Vornado Real Estate Trust (VNO) and Boston Properties, Inc. (BXP), focused on the incredibly low initial jobless claims number, which hit lows we hadn’t seen since early 2000.

Homebuilders and margins

We heard from Standard Pacific (SPF) last week. It has been the typical story for the builders. Increases in average selling prices have been driving the top line. Margin expansion may be plateauing, however, and Meritage Homes (MTH) noted seeing margin pressure. Margin pressure is a first. Gross margins will decrease. Builders are unable to keep raising prices and their input prices—primarily skilled labor—keep rising.

Existing home prices are also plateauing, as we saw from the Case-Shiller numbers. Prices have risen too far too fast and the median house price to median income ratio is back out of its historical 3.2x–3.6x range. This means that in order to see further home price inflation, we’ll need to see wage growth. This again means lower margins for the builders.


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