The Future of Commercial Real Estate ETFs
November 10th 2009 at 2:00pm by Tom Lydon
As we take a moment to reflect on the past year, it becomes obvious that the housing market bust crippled the economy. What made this cyclical bust in the real estate and related exchange traded fund (ETF) markets different from the others?
Unrealistic assumptions, multiple layers of investors and obscene prices in the commercial real estate market are all part of the reason why the current housing bust is costlier and more complicated than previous ones, comment Mara Der Hovanesian and Dean Foust for BusinessWeek. Average housing prices have already plummeted 41% from the 2007 peak. (Long or short commercial real estate?)
In times past, developers would speed up production to cash in on a real estate bull market, but some defaulted on loans and lenders were stuck with what they financed. What makes this current bust novel is that the oversupply of money from our greedy and eager bank caused our current situation – you may have heard of mortgage-backed securities. “If the cash flow wasn’t there, you had to ignore it or find ways to create it,” remarks a banker at a large Wall Street firm.
Additionally, the wanton lending environment was ideally suited for confidence schemers and swindlers who were able to receive large loans. Loan officers during the credit boom were basically ignoring obvious problems that should have raised red flags.
More than $1.4 trillion in commercial real estate loans will be due between now and 2012. The potential losses or defaults may further dampen lending, and, consequently, impede economic growth. Some feel that if the sector can roll over this debt, REITs and ETFs may be fine. But if they can’t, it’s cause for concern.
Commercial real estate ETFs are trading above their trend lines right now, but watch them closely for any correction and have a stop loss. (How to follow trends).
- First Trust S&P REIT Index (NYSEArca: FRI): up 17.9% year-to-date
- Vanguard REIT Vipers (NYSEArca: VNQ): up 19.1% year-to-date
- SPDR Dow Jones REIT (NYSEArca: RWR): up 17.8% year-to-date
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.