Real estate may appear to be a singular industry to the masses, but it has multiple personalities if you dig a bit deeper.
True, Mr. Market hasn’t been much for distinguishing among the various corners of real estate in recent years. A bull market in virtually anything associated with property has diminished the incentive to emphasize differences. But now there are pressing questions about where real estate goes from here, and what it means for Fed policy and the economy. Those questions are resurrecting a focus on the divisions that were always relevant in real estate, but otherwise ignored when profits came easily.
In one corner is the ever-popular REIT industry, a long-running favorite of optimists, thanks in no small part to a bull market that’s run longer than many thought possible. On the opposite side of the sentiment scale these days is the homebuilding industry, populated by the likes of such companies as DR Horton and Toll Brothers.
While REITs and homebuilders are both in the business of real estate, no one will confuse their investment performance of late. The Morningstar homebuilder industry index is down so far this year by 6.3% through yesterday, April 26. REITs, on the other hand, remain firmly in the black, and strikingly so. So far this year, the Morningstar REIT index has climbed 8.6%–well above average for stocks generally, to judge by the S&P 500’s year-to-date climb of 5.1%.
Is this divergence something more than just a curiosity? Real estate, after all, is front and center as a key industry to which the Federal Reserve looks in deciding if additional interest-rate hikes are necessary, or so we’ve been told by several investment strategists and economists. True, there are many factors that weigh on the central bank’s monetary policy, but arguably the property market carries a bigger-than-usual weight these days.