By ETF Heat Map Team
Home prices continued their ascent in July, and the S&P CoreLogic Case-Shiller Indices assert that there is no reason to think that a reduction or collapse in prices is on the horizon. According to the U.S. National Home Price Index which covers all nine American census divisions, single family home prices increased by 5.1% in July.
Homes prices have been climbing approximately 5% on a yearly basis for the previous two years, and current home prices are fast approaching historical all-time record highs that have not been seen since before the financial crisis. Houses in 7 out of 20 major U.S. cities are costly than ever today. However, it is interesting to note that despite increase in home prices the number of people borrowing large sums of debt has not increased as much as it did before the financial issues. Outstanding mortgage debt on family dwellings of four or less people is on average 13% less than in 2008. Managing Director and Chairman of the Index Committee at S&P Dow Jones Indices, David Blitzer, commented that, “There is no reason to fear that another massive collapse is around the corner. The run-up to the financial crisis was marked with both rising home prices and rapid growth in the mortgage debt.”
ETFs are a great way to gain exposure to the real estate market. The BlackRock iShares U.S. Real Estate ETF, listed as IYR, has an expense ratio of 0.44% and has delivered a year to date NAV total return of 12.53% as of September 28, 2016. The Vanguard REIT ETF, listed as VNQ, has expense ratio of only 0.12% and year to date NAV total return of 14.13%. Both the IYR and VNQ ETFs outperformed the SPDR S&P 500 ETF, listed as SPY, by 4.66% and 6.26%, respectively. SPY had a year to date NAV total return of 7.87%.
Homebuilder and real estate ETFs worth considering include:
- ITB – iShares U.S. Home Construction ETF
- VNQ – Vanguard REIT ETF
- IYR – iShares U.S. Real Estate ETF
- RWR – SPDR Dow Jones REIT ETF
Due to the Federal Reserve’s efforts to keep interest rates near zero, mortgage rates for housing have been at all-time record low. Policymakers do expect at least one interest rate hike before the end of 2016. The good news for the housing market is that the increase in rates will be gradual and the effect on the housing market is expected to be slow. Mortgage rates will continue to be at low levels which would allow prospective home owners to take on affordable mortgagees at historically low interest rates.
Mr. Blitzer also highlighted that, “The S&P CoreLogic Case-Shiller National Index is within 0.6% of the record high set in July 2006.”
Greatest year over year price gains where enjoyed by Portland, Seattle, Denver, and Dallas which observed price increases of 12.4%, 11.2%, 9.4%, and 8.3%, respectively.