Two Major Reasons To Like REITs Right Now (NYSEARCA:VNQ)
Tom Essaye: Each week, I review all the important economic data that comes out. A lot of the time, I’m analyzing it versus Wall Street analysts’ expectations. More importantly, though, I’m searching for clues within the data.
But the one thing I try to consistently do is uncover longer-term trends, as opposed to getting caught up in just one, single data point.
Right now, the markets are chock-full of economic data. And as I was reviewing last week’s various economic releases, I found that most generally indicated the economy was losing positive momentum. Manufacturing data in particular has shown a slowing of growth since early April.
However, despite the general bearishness of economic data, I also noted something curious.
The only bright spot we got in the data last week? Oddly enough, it was in the housing market.
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Both existing- and new-home sales beat expectations, and showed a continuation of a very slow recovery that began in the summer of 2010.
As I step back and think about it, it seems that I am consistently seeing better and better news regarding the domestic housing and real-estate market. And, to a point, it’s kind of flying under the radar.
As you know, being a contrarian investor, I’m constantly on the lookout for sectors that have been beaten down. But that’s only the first step.
Once I’ve found those beaten-down names, I’m also watching their performance very closely — particularly, the ones whose performance improves a bit each month.
Housing is one of the few sectors I can find that fits that bill.
As a result, as we endure this global-macroeconomic-dominated, euro-centric trading environment, I will keep an eye on housing and, in particular, Real Estate Investment Trusts (REITs).
While REITs are not an exact proxy for the real-estate market, their performance tends to be positively correlated. (That is, they move relatively in tandem.) So, a continued recovery is generally positive for these REITs.
2 Reasons to Like REITs Right Now
In addition to the slow, gradual recovery in housing, most typical REITs’ main properties — office space and retail locations (like malls) — are actually in two of the brightest spots in the economy: Corporate profits (and cash-on-hand in corporations) and consumer spending.
Additionally, the dividend yield on REITs is very attractive, especially in a zero-interest-rate environment.
Now, I’m not saying that the real-estate market is going gangbusters again or that housing, nationally speaking, is in a bull market. It will take years for it to recover, and there are still plenty of pitfalls to be wary of.
Yet, the data also shows that there is a very slow, gradual recovery taking place in housing. It’ll take a long time to get back to normal, and there will be fits and starts, but things are heading in the right direction.
One way to play REITs is through the Vanguard REIT ETF (NYSEARCA:VNQ), which is trading in the $63 area as of this writing. It’s one of the best-diversified and well-balanced REITs on the market, and pays more than a 3 percent yield.
As contrarian investors, we always want to be on the lookout for sectors where the fundamentals are improving, before the rest of the market realizes it. And even though this sector is slow-moving, it still looks like it will continue on the path toward recovery.
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