By Investment Associate Bobby Adusumilli, CFA.
As anyone who was looking to purchase or sell a home in 2021 knows, the US real estate market grew a lot in value in 2021. For example, the US publicly-traded real estate market, as measured by the Dow Jones US Select REIT Index, returned nearly 46% in 2021, the best year since the index began in 1987.[1]
One driver of REIT performance is property and housing values. Heavily driven by the decline in interest rates resulting from the COVID-19 pandemic, Americans spending more time working remotely, as well as record amounts invested from investment firms, home purchases have been driven by a surge in demand combined with a relatively steady supply.[2][3]
Source: S&P Dow Jones Indices LLC, S&P/Case-Shiller U.S. National Home Price Index [CSUSHPISA], Federal Reserve Bank of St. Louis, 16-Feb-2022, fred.stlouisfed.org.
In the second edition of his famous book Irrational Exuberance that was released in 2006, Nobel Prize-winning economist Robert Shiller wrote, “It is true that for the United States as a whole real home prices were 66% higher in 2004 than in 1890, but all of that increase occurred in two brief periods: the time right after World War II (with the first increases occurring in the early 1940s, just before the war ended) and a period that appears to reflect a lagged response to the 1990s stock market boom (or a response to its boom and crash), with the first signs of increase occurring in 1998. Other than those two periods, real home prices overall have been mostly flat or declining.“[4]
The above data suggests that this past decade - particularly in 2020 and 2021 - are a third such period of a rise in real home prices in the United States.
However, we believe that some of the factors driving this rise are unsustainable. According to the Wall Street Journal as of late 2021, the median time a home stays on the market in the US is around one week, which is a record low.[5] Many purchasers today are no longer taking advantage of low interest rates, often paying all-cash at a price above listing in order to beat out other purchasers.[5] In a sign of exuberance, many homebuyers are not even inspecting these homes as a contractor would recommend.[5]
With short-term interest rates expected to increase significantly throughout 2022, as well as an already growing home supply projected over the next few years, we do not expect this current housing boom to sustain its pace.[6][7] As a result of this and other evidence, we believe that publicly-traded REIT investments will have lower expected returns over the medium-term compared to the last ten years, though we still expect returns to remain positive over the medium- to long-term.
Important Disclosure Information & Sources:
[1] Source: Dimensional Returns Web. The Dow Jones U.S. Select REIT Index tracks the performance of publicly traded REITs and REIT-like securities and is designed to serve as a proxy for direct real estate investment, in part by excluding companies whose performance may be driven by factors other than the value of real estate.
[2] “U.S. Existing-Home Sales Reached a 15-Year High of 6.1 Million Last Year“. Nicole Friedman, 20-Jan-2022, wsj.com.
[3] “Building and Renting Single-Family Homes Is Top-Performing Investment“. Will Parker, 09-Nov-2021, wsj.com.
[4] Irrational Exuberance. Robert Shiller, 2006, Crown Business.
[5] “Homes Now Typically Sell in a Week, Forcing Buyers to Take Risks“. Nicole Friedman, 11-Nov-2021, wsj.com.
[6] “Fed Signals Rate Increase in March, Citing Inflation and Strong Job Market“. Jeanna Smialek, 26-Jan-2022, nytimes.com.
[7] “New Privately-Owned Housing Units Started: Total Units“. Federal Reserve Bank of St. Louis, 31-Dec-2021, fred.stlouisfed.org.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Indices are not available for direct investment. Index performance does not reflect the expenses associated with management of an actual portfolio. Index performance is measured in US dollars. The performance of the indices was obtained from published sources believed to be reliable but which are not warranted as to accuracy or completeness.
Statements contained in this report that are not statements of historical fact are intended to be and are forward looking statements. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.
Advisory services are provided by SJS Investment Services, a registered investment advisor (RIA) with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professionals for specific advice. This material has been prepared for informational purposes only.
Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.