Consumers are becoming slightly less bullish on real estate
For most US citizens, their primary residence is their biggest asset. As a result, their spending patterns are highly levered to housing. During the housing bubble, many homeowners monetized home price appreciation through cash-out refinances and used it to fund consumption.
That state of affairs ended with the real estate bubble. These days, most cash-out refinances are used to pay off expensive credit card debt and not to buy a boat.
Perceptions about future home prices
Over the past year, the percentage of people who think that home prices will increase fell to 44% from 48%. Month-over-month, this number was flat. The number of people who expect home prices to drop increased 1% to 11%.
Finally, the number of people who think home prices will stay the same increased 7% to 46% year-over-year. Interestingly, consumers are way more bullish about rental prices than they are about house prices. Rental price inflation has been picking up.
Tight inventory remains the biggest issue for prices. According to the National Association of Realtors, the current inventory of existing homes for sale is about 4.5 months. This indicates a very tight market. An inventory of 6.5 months indicates a balanced market. Builders remain cautious and credit remains tight. This is something that was mentioned on earnings conference calls from PulteGroup (PHM) and D.R. Horton (DHI).
Implications for real estate companies and REITs
Bullishness on house prices impacts REITs in a number of ways. For the big agency REITs like Annaly Capital (NLY), MFA Financial (MFA), and American Capital Agency (AGNC), bullishness usually translates into more activity. This means more sales and ultimately higher prepayment speeds. Rising real estate prices can be positive for non-agency REITs. However, they can be negative for agency REITs.
For real estate companies like Colony Financial (CLNY) and Northstar Realty Finance (NRF), higher prices mean fewer defaults. With interest rates and prices rising, more investors are rotating out of REITs that primarily bear interest rate risk into REITs that bear more credit risk.
Investors who are interested in trading the mortgage REIT sector could look at the iShares Mortgage Real Estate ETF (REM).