We are currently in the midst of one of the strongest housing markets the country has ever seen. Home prices have appreciated by 20.6% between March 2020 and March 2022. By now, we all have an idea of how this happened—low-interest rates, easy money policy, demand driven by a new post-covid lifestyle, and a housing supply that can’t keep up with demand.
The Fed and Inflation
Yet over the past few months, cracks in the boom have started to appear as the Federal Reserve policy has turned toward keeping inflation down, increasing interest and mortgage rates. The stock market is on the verge of entering into bear market territory and consumer spending has declined. At face value, this should seem like the end of the boom and a transition to a more normal real estate market.
Recent data, though somewhat lagging, doesn’t necessarily line up with a slowing market. In fact, you can make the case that the current market is primed for even more explosive growth due to real estate investment being the “last man standing”. Let’s start with the premise that thanks to the Fed and government policy, there’s a lot of money out there, both in the hands of individuals as well as institutions. With inflation continuing to burn a hole in cash positions, people want to invest in something to keep pace with or to outperform inflation. Choices are limited between the stock market—which is volatile, risky, and potentially more downside if inflation persists and rates go higher—and fixed income—which is not the place to be in a rising rate environment.
A common investment suggestion during inflationary periods is to invest in “hard assets”. These include commodities, like precious metals, and real estate. Commodities, like real estate, are priced based on supply and demand; however, during a general economic downturn, the demand for certain commodities can drop off significantly. The same cannot be said for real estate. People will still need a place to live. Demand is very very sticky. And that’s just from people buying to live.
Driving Housing Prices and Demand
Inflation is not just measured by rising prices, it also measures the population’s expectations for prices in the future. And this expectation of higher future prices generates demand. This expectation is part of what has driven the current housing boom—why people are willing to go into bidding wars and pay far greater prices than initially expected. If this expectation persists, whether due to inflation, or a continued increase in prices, the increase in housing prices can continue and even accelerate from panic buying.
Despite the rise in prices and transaction volume, there are so many market participants on the sidelines, waiting for prices to decline. When the catalysts for a decline take place, and the market continues to rise, we will see a similar psychological reaction to the market that we’ve seen repeatedly in the equities market—panic buying. Participants will be scared not to buy, with expectations of even higher prices despite the headwinds, and then a continued expansion when those headwinds dissipate.
The last period with major inflation was of course the 1970s. The rate of inflation went from 3.7% in 1972 to more than 11% in 1974 and peaked at over 13% in 1980. This period also included a steep recession from 1974 to 1975. Yet from 1972 to 1980, home prices increased by more than 27% while the S&P 500 declined by more than 40%.
Of course, time will tell how the real estate market reacts to the macro-level catalysts taking place right now, but for those betting on a decline in prices, I would hesitate to take a short position where the upside “risk” could easily escalate into a boom that could make the last couple of years seem like the status quo.
With rising rates having already resulted in a significant pullback in the valuation of high-growth technology stocks, an interesting way to gain exposure to the real estate market is through a portfolio of real-estate tech stocks. The ETFMG Real Estate Tech ETF (NYSE: HHH) Is the first ETF designed to give investors access to companies primarily focused on real estate technology. This fund is designed to give pure-play exposure to global technology companies that are digitally transforming the real estate industry to optimize the way people research, rent, buy, sell and manage property. If an investor is looking to get exposure to real estate, coupled with a high-growth technology sector HHH could be a viable investment.
Carefully consider the Fund’s investment objectives, risk factors, charges, and expenses before investing. This and additional information can be found in the Fund’s prospectus, which may be obtained by calling 1-844-ETF-MGRS (1-844-383-6477), or by visiting www.etfmg.com/HHH. Please read the prospectus carefully before investing.
Investing involves risk, including the possible loss of principal. Shares of any ETF are bought and sold at market price (not NAV), may trade at a discount or premium to NAV and are not individually redeemed from the Fund. Brokerage commissions will reduce returns. Narrowly focused investments typically exhibit higher volatility. The Fund is non-diversified, meaning it may concentrate its assets in fewer individual holdings than a diversified fund. Investments in smaller companies tend to have limited liquidity and greater price volatility than large capitalization companies. Technology companies may have limited product lines, markets, financial resources or personnel. The products of technology companies may face obsolescence due to rapid technological developments and frequent new product introduction, and such companies may face unpredictable changes in growth rates, competition for the services of qualified personnel and competition from foreign competitors with lower production costs. Companies in the technology sector are heavily dependent on patent and intellectual property rights. The loss or impairment of these rights may adversely affect the profitability of these companies.
The Fund is a recently organized investment company with limited operating history. As a result, prospective investors have a limited track record or history on which to base their investment decision. There can be no assurance that the Fund will grow to or maintain an economically viable size.
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