The real estate sector remains a two sub-sector affair with investors continuing to put their money to work in housing while avoiding the commercial sector. I expect this trend is not going to change anytime soon as the continuation of the macrotrend involving the migration to the Sunbelt isn’t likely to change in 2024.
That said, it’s important to recognize when it’s time to put money to work and where to deploy it. In this post, I review the early action in 2024, which could well set the tone for at least the first quarter and perhaps the rest of the year.
Those who have followed my real estate posts in this space, likely caught the reversal in bond yields which I predicted way back in September and October, 2023 via this post on homebuilders, and this post on REITs. Thankfully, I was right and investors who followed my suggestions have done well, especially subscribers to Joe Duarte in the Money Options.com where we’ve held several homebuilders and REITs which have done well since I issued the alert.
Bond Yields Test the 4% yield.
As a result, it’s important to see where things stand now, as we begin a new year. And as usual, due to the interest rate sensitive nature of real estate, the best place to start in with a look at bond yields and mortgage rates.
The U.S. Ten Year Note yield (TNX), is the benchmark for residential mortgage rates and its trend is a primary influence on financing rates for all real estate transaction rates. As we start 2024, TNX is reversing the decline we saw in the fall of 2023. The key yield point to monitor is 4%.
You can see, via its price chart that this yield area, is a major resistance point, as the 200-day moving average currently sits at 4.037%. If TNX moves decidedly above this point, it would be a major negative, at least in the short term. A more likely scenario is a consolidation pattern with TNX moving just above and below the 200-day line.
In addition, keep an eye on the RSI indicator, which became very oversold when TNX broke below 4%. A breach of RSI above 50 would indicate that TNX will rise further.
Mortgage rates follow TNX. As a result, we’ve had a major decline since October. The chart above shows the impressive decline in rates as of December 28, 2023. Here, a reversal above the 50-day moving average, near 6.8% would be a negative development.
Homebuilders Retain Bullish Long Term Dynamic
The homebuilder stocks are well due for what could be a lengthy consolidation. The SPDR S&P Homebuilders ETF (XHB) gained nearly 40% in the third quarter. You can see by its price chart that its RSI is well above 70 (very overbought).
On the other hand, neither Accumulation/Distribution (ADI) or On Balance Volume (OBV) for XHB hare reached a point which suggests that very aggressive selling will take place. Certainly, this could change, and it’s worth keeping an eye on.
REITs Show Relative Strength
Meanwhile, the residential housing portion of the real estate market, which houses the single and multi-family home sectors is showing relative strength.
Note the bullish tone in the price chart for the iShares Residential Real Estate Capped ETF (REZ). ADI and OBV are in a more bullish posture for REZ than for XHB, despite its overbought status.
Bottom Line
The long term investing fundamentals for residential real estate, both in terms of owning a home or renting an apartment or a single family home remain positive. Low interest rates are supportive of this trend remaining in place. A reversal in interest rates would be very negative.
In the short term, the homebuilder stocks are very overbought and may face some headwinds. This is leading to a shift in investor interest toward the residential REIT sector.
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