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Why the Recent REIT Rebound Could Stretch a Little Further

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Interest rates dominate real estate

The real estate sector (VNQ) has been lagging in performance in 2018. It’s seen a YTD (year-to-date) loss of 6%, 8% lower than the S&P 500’s (SPY) YTD return.

The reason for this decline has been the increase in interest rates and expectations of a higher interest rate in the future, which could dent demand in the real estate sector.

The performance of the real estate sector has been a roller-coaster ride as interest rate expectations have continued to change with every incoming piece of data over the last few months. The rise in risk aversion on recent geopolitical tensions and volatility in global crude prices has also had an impact on the sector.

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Increased correlation between bond yields and the sector

The euphoria surrounding the yield on the benchmark ten-year government bond breaching 3% has impacted the performance of the real estate sector. The Vanguard Real Estate ETF (VNQ) and the iShares US Real Estate ETF (IYR) fell 3% in the week that the ten-year (IEF) yield broke above 3% and rebounded 2% in the week that ended on May 25, when bond (BND) yields fell due to risk aversion and dovish FOMC May meeting minutes.

Why the REIT rally could stretch a little further

Many factors support the view that there’s more room for growth in the real estate sector. Rising wages and low unemployment levels are pushing young investors toward real estate investments that include home ownership and REITs.

The latest survey of homebuilders indicates that they are confident in the sector’s growth. The National Association of Home Builders Housing Market Index has risen to 70 in May. In the next article, we’ll discuss the performance of REITs in the most recent earnings season.

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