How REITs Affect Home Prices

Amy Ishlan
March 25, 2024

The Motley Fool advises, "Anyone can invest in wealth-creating real estate through real estate investment trusts (REITs)," but what does that mean for home prices?

Inputs that matter: As real estate investing transforms from a brick-and-mortar industry to paper trading securities, home values will be affected.

  • Fool.com reports, "The ultra-wealthy invest more money into alternative investments like real estate than other investors."
  • Securitizing real estate investing makes it easier for anyone to benefit from real estate while eliminating the need for property management.
  • According to Fool.com, "Over the past decade, real estate has returned 8.8% annually."

The opportunity: Freddie Mac reports that the average rate for a 30-year fixed mortgage increased from 6.74% to 6.87% for the week ending March 21.

  • Realtor.com reports, "A whopping 17.8% more sellers listed their homes in the week ending March 16 compared with last year."
  • Senior economic research analyst for Realtor.com, Hannah Jones, explains, "Falling mortgage rates hinge on falling inflation, but recent data still puts inflation well above the Fed's 2% target."
  • NPR details that economists at the Federal Reserve Bank of Richmond estimate the changes to the real estate commission could save homebuyers $30 billion annually.

Zoom in: Forbes reports, "The rate at which real estate investment trusts (REITs) are investing in single-family homes in order to rent them is quickly increasing."

  • REIT investors typically pay over market value to price out other home buyers.
  • Forbes explains that this long-term view reduces the supply of houses and those able to afford them to increase rental demand and associated rents as their cash flow.

Between the lines: S&P Global reports, "Over the past 25 years, real estate investment trusts (REITs) have emerged as a popular and efficient way for market participants of all stripes to access the real estate asset class."

  • 75% of a REIT revenue must come from the ownership and operation of real estate assets.
  • A study by Wharton found that the relationship between REITs and their underlying real estate is weak.
  • Only in office space does the underlying asset influence the REIT price.
  • This is because securitized assets tend to take on a life of their own, such as the separation between stock price and company revenue.

Follow the money: According to Investopedia, four key factors impact real estate prices:

  • Demographic factors - "Major shifts in the demographics of a nation can have a large impact on real estate trends for several decades."
  • Interest rates - "Changes in interest rates can greatly influence a person's ability to purchase a residential property."
  • The economy - "Broadly speaking, when the economy is sluggish, so is the real estate market."
  • Government policies - "Tax credits, deductions, and subsidies are some of the ways the government can temporarily boost demand for real estate."

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Read More

  1. https://www.fool.com/investing/2024/03/24/is-real-estate-a-solid-investment/
  2. https://www.realtor.com/news/trends/mortgate-rates-housing-statistics-week-ending-3-21-24/
  3. https://www.npr.org/2024/03/22/1239486107/realtor-fee-commission-homes-for-sale
  4. https://www.spglobal.com/spdji/en/documents/research/the-impact-of-rising-interest-rates-on-reits.pdf
  5. https://www.efmaefm.org/0EFMAMEETINGS/EFMA%20ANNUAL%20MEETINGS/2022-Rome/papers/EFMA%202022_stage-3032_question-Full%20Paper_id-190.pdf
  6. https://realestate.wharton.upenn.edu/wp-content/uploads/2017/03/693.pdf
  7. https://www.investopedia.com/articles/mortages-real-estate/11/factors-affecting-real-estate-market.asp