Will the United States become the world’s largest real estate market, replacing China?
The United States real estate industry was in the news recently, as it replaced China to become the world’s largest real estate market.[1. Source: Forbes] The majority of this achievement is due to states such as Texas, New York, and California. The reason for the shift is increased turbulence in international markets as a result of uncertainty in the European Union. This tension stems from the Greece Crisis, lack of confidence in the Chinese stock market with its recent crash, and Middle East political instability—all coupled with the strong dollar demand.
New Jersey is a good example of this trend. Though New Jersey shares a boundary with New York, its property market has not recovered much after 2008. The state has seen a foreclosure rate of 8.12% with low prices. Usually, low interest rates and financing eventually attract buyers, but that time has yet to come.
Impact of undervalued properties on ETFs
Many REITs are investing heavily in New Jersey—for instance, Strategic Hotels and Resorts (BEE) and Mac Cali Realty (CLI). These stocks may be undervalued. So you can see the impact of undervalued properties on ETFs.
The potential impact of the investment reflects in the iShares US Real Estate ETF (IYR). The major sub-group of this widely tracked ETF, real estate services, rose 1.37%, although the ETF as a whole experienced a negative return of -3.35%.
The iShares Mortgage Real Estate ETF (REM) is another widely tracked ETF. It experienced a trailing five-day return of -6.03% on its 37 constituent stocks. The only stock that had a positive return was RAIT Financial Trust (RAS), earning a 0.77% return. The mortgage market is effectively experiencing a mass exodus of investors following an expectation of the Fed setting higher interest rates.