Originally published in USA Today
By Sanjoy Ghosh
Housing is back. Prices are rising. Sales are up.
Prices are still way below their 2006 highs, and any number of things — particularly higher interest rates — could yet derail the housing recovery. But for the first time in years, market realities and political will seem to be moving in tandem in support of housing.
Mortgage applications, both for new home purchases and refinancing, are on the rise this year. Home prices have improved in many, if not most, areas, as well— albeit slowly. The S&P/Case-Shiller U.S. National Home Price Index recorded a 4.7% annual gain in November 2014, slightly above the 4.6% level recorded one month earlier.
Meanwhile, President Obama last month lowered the mortgage insurance rates on Federal Housing Administration loans. Fannie Mae and Freddie Mac have also reduced down-payment requirements on loans they buy.
Lower oil prices may help some homeowners, particularly in the Northeast, when buyers calculate the cost of heating a new home.
However, that low oil environment could yet shake up a number of local economies, where large numbers of jobs depend on the energy sector. Texas and Oklahoma, for instance, could take a hit from low oil prices. And certainly Williston, N.D., where some 30% of jobs are dependent on the shale energy sector, will feel the pain.
Perhaps less obvious: Lower oil prices could mean low inflation, and therefore less pressure on the Fed to raise rates immediately.
If, overall, an investor feels bullish about housing but isn’t in the market to buy a home, how can he or she invest?
Exchange-traded funds or ETFs are one way.
No ETF tracks national residential real estate prices, but some offer partial exposure to the housing segment.
Charles Sizemore, founder of registered investment advisor Sizemore Capital in Dallas and portfolio manager for three portfolios on Covestor.com, suggests these two areas:
- Homebuilder ETFs, such as the SPDR S&P Homebuilders ETF (XHB). The sector is semi-reliant on home sale prices, but be aware that this sector is also sensitive to other factors, such as financing availability and population growth.
- Mortgage REITs (real estate investment trusts), such as the iShares Mortgage Real Estate Capped ETF (REM) or the Market Vectors Mortgage REIT Income ETF (MORT). These ETFs borrow lower-rate, short-term money to buy higher-rate, longer-term mortgage securities. Caveat: These funds are very interest-rate sensitive; don’t buy if you believe the Fed will raise interest rates significantly anytime soon. Stay away from those that use leverage, too.
Skeptical of a real estate rebound in single-family housing? Do you believe that the sizable millennial generation will remain renters rather than buyers for the foreseeable future?
Sizemore has an ETF pick if you want to play the rental theme: Rental market ETFs, such as the iShares Residential Real Estate Capped ETF (REZ). These ETFs track the performance of the nation’s residential apartments, manufactured homes, health care and self-storage real estate sectors.
Sanjoy Ghosh is the Chief Investment Officer of online investments marketplace Covestor.com