All of the economic focus in the US at the moment is on the talk of trade tariffs and their potential for destabilizing the global economy, but there is another important economic development that has slipped under the radar: the growth of the real estate sector.
This may ring alarm bells for some investors. After all, it is only ten years ago that the housing market was at the center of the biggest economic meltdown since the Wall Street crash. Even the mention of investing in real estate may cause horror in some areas.
But the world in 2018 is not the same as in 2008 or 1998. There is no doubt that the US real estate sector took a hammering as a potential investment vehicle as a result of the credit crunch, but a closer look at the current state of affairs in the US real estate market reveals that the situation now is very different, and that what we are seeing is investment-friendly, steady growth, not a new 2000s-style housing bubble.
A glance at any current list of homes for sale, whether that is homes for sale in Park City, Utah, or Manhattan, New York, will show a housing market in good health, which is great news for investors. Real estate can offer investors a good way to earn above-average yields on their money, and has the additional bonus of offering growth with minimal volatility. Right now, US real estate is one of the strongest sectors out there.
One of the clearest indications of the strength of this market is the number of housing starts. Data provided by the Commerce Department showed that in May, housing starts increased by 5 percent to an annual rate of 1.35 million units, once seasonal adjustment has been applied. This represents an 11-year high for home building.
There is more good news for investors, in that there was also a drop in building permits of around 4.6 percent. This means that, underlying the growth of the housing market, there is no sign of overheating or of a housing bubble. The combination of steady growth without any hint of dramatic volatility is ideal for potential investors, as is the implication that there is much more room for further growth as supply of housing is not matching demand.
Improvements in the housing sector are also good news for the wider economy and for investment prospects. Historically, when there is a downturn in home building, it is usually followed by a decline in the US economy. So while the housing starts trend continues to rise, investors can assume that the underlying position of the US economy is strong and that there is no imminent danger of a recession.
Another measurement that confirms this trend is the Green Street Advisors U.S. Commercial Property Price Index GSA (CPPI). This is an important index that records the prices of commercial real estate transactions, and enables us to see at a glance the price trends in commercial property. CPPI reports are showing that the value of commercial real estate is heading in an upward direction, which is good news for all investors.
Logically, it should be the case that companies operating in the real estate sector should also be doing well, and that is confirmed when you compare real estate stocks to the S&P 500 Index. Real estate stocks are significantly outperforming the S&P, along with many other sectors of the economy. The iShares U.S. Real Estate ETF (IYR) has been outperforming the S&P since March and continues to do so as the housing market grows stronger.
So what does this mean for investors? It makes sense in this economic environment for all investors to consider getting involved in the real estate sector, perhaps through the IYR in the short and medium term. The continued strength of the US economy and the steady growth of the real estate sector, along with the lack of overheating, all combine to create the ideal investment environment for those planning to invest in US real estate.
Real estate is not immune to the overall state of the economy, of course, and if the current trade tariff battles and the ongoing debt crisis combine to harm the US economy, the real estate sector will be affected. But there is no imminent sign of that happening, and for investors, the US housing market looks to be a good place to put your money in the short and medium terms.