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Why Real Estate ETFs are Likely to Beat Homebuilding in 2022

Rising inflation, uptick in home prices, rising mortgage rates, a hawkish Fed and handsome yield in real estate securities may help REIT or real estate ETFs to outpace homebuilding ETFs...

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This story originally appeared on Zacks

The U.S. real estate sector is in the pink of health currently. Vanguard Real Estate Index Fund ETF Shares VNQ has gained 1.8% in the past month. One of the best-performing real estate ETFs in the past month has been Nuveen Short-Term REIT ETF NURE (up 3.4%).

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Though homebuilding stocks beat renting in 2021 as evident from a 42.9% one-year jump in iShares U.S. Home Construction ETF ITB versus 35% gains in VNQ, the trend has changed lately. ITB is off 2.6% past month.

We expect real estate ETFs to beat homebuilding ETFs in 2022. Here are some of the reasons for the same.

Rising Inflation

The annual inflation rate in the United States accelerated to 6.8% in November of 2021, the highest since June of 1982, and in line with forecasts. It marked the ninth consecutive month in which inflation stayed above the Fed's 2% target mainly due to supply chain disruptions and a low base effect from last year. In a rising inflation environment, real estate stocks act as a good bet. The resale value of a property and rental income, rise with price inflation.

Apartment Rent and Occupancy Hit Record Highs

Residential and commercial real estate rents are strongly rebounding lately, after last year’s plunge due to the pandemic. Apartment rent and occupancy hit new records in November, even as the rental market entered its traditionally sluggish season. Apartment occupancy hit a new high of 97.5% in November, according to RealPage, a real estate technology platform, as quoted on CNBC. The annual increase in asking rents for new move-in leases hit 13.9%.

The Uptick in Home Prices is a Boon for Renters

“The rental market is actually stronger than the for-sale market right now,” said one real estate industry observer, quoted on CNBC. This is due to extremely high home prices, which are up nearly 20% year over year. Thanks to extremely low mortgage rates, demand for homes is high. But higher demand for home buying as well as lack of labor and land has boosted home prices. This is a great scenario for renters.

Along with some analysts, we too believe that fast-rising home prices are likely to keep prospective homebuyers away from ownership and direct them toward the rental market. “Homeownership is still dead in this country because the only people that are buying homes right now are people that have equity, great credit and a job,” multi-family housing investor Grant Cardone told Yahoo Finance, quoted an article.

Fed to Turn Hawkish in 2022

The Fed is likely to enact its first rate hike in three years in March to counter inflation. The rate on the 30-year fixed mortgage — the most common home loan for homebuyers — rose from 3.11% to 3.22% this week, the highest level since May 2020, according to Freddie Mac, quoted on Yahoo. The rate is more than half-point higher than 2.65% a year ago. Homebuilding stocks may take a hit in the coming days due to the double whammy of rising home prices and higher mortgage rates. People may turn to rent instead of home buying.

Real Estate a Lucrative Yield Destination

If these are not enough, yield is great for real-estate stocks and ETFs as these are high-yielding in nature. The benchmark U.S. 10-year Treasury yield was 1.71% on Jan 5. Against such a backdrop, dividends offered by real estate ETFs are quite sturdy.

Some of the decent real estate ETFs right now are Global X SuperDividend REIT ETF SRET (yields 6.29% annually) and Invesco KBW Premium Yield Equity REIT ETF KBWY (yields 5.52% annually).



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Vanguard Real Estate ETF (VNQ): ETF Research Reports

 

iShares U.S. Home Construction ETF (ITB): ETF Research Reports

 

Invesco KBW Premium Yield Equity REIT ETF (KBWY): ETF Research Reports

 

Global X SuperDividend REIT ETF (SRET): ETF Research Reports

 

Nuveen ShortTerm REIT ETF (NURE): ETF Research Reports

 

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Zacks Investment Research