Week in Review: Housing Starts and Building Permits
The FOMC Meeting Will Be the Biggest Event This Week
Week in review
Last week brought us some important housing data, but not much else in the way of big economic data. On Monday, we saw the National Association of Home Builders’ Housing Market Index, which had its strongest reading in ten years. While sentiment is extremely strong among builders, it isn’t translating into actual starts and permits. Housing starts did come in better than expected at 1.2 million, but that number is 20% below the average for 1959–2002. Building permits disappointed.
On Thursday, we had the FHFA House Price Index, which showed real estate prices are within 1% of their peak levels. Note this index looks only at houses with conforming mortgages, so it is a narrower index than some of the other housing market indices. Existing home sales rose to 5.6 million, and supply remains tight, with only about 4.8 months’ worth of supply.
We also heard from PulteGroup (PHM), which announced an earnings miss.
Implications for mortgage REITs
Bond yields rose 5 basis points last week. Overall, it appears that bond market volatility is decreasing. This is good news for mortgage REITs, particularly agency REITs such as Annaly Capital Management (NLY) and American Capital Agency (AGNC), which are exposed to rate volatility. REITs exposed to adjustable-rate mortgages such as MFA Financial (MFA) are a little more insulated from interest rate moves, as the coupon rates on their mortgage-backed securities (MBS) also adjust with interest rates.
Investors interested in making directional bets on interest rates can look at the iShares 20+ Year Treasury Bond ETF (TLT). Those interested in trading in the mortgage REIT sector through an ETF can look at the iShares Mortgage Real Estate Capped ETF (REM).
For mortgage REIT investors, the markets will likely turn inhospitable as the Fed begins the normalization process. That being said, taking credit risk through non-agency REITs will probably be the best strategy in an environment of rising yields driven by economic strength.
Implications for homebuilders
Homebuilders were encouraged by the sentiment and pricing data, but they aren’t really building yet. You can invest in homebuilders through the SPDR S&P Homebuilders ETF (XHB).
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