Mortgage REITs rely on short-term loans, so costs could rise if short-term rates suddenly spike. However, the negative effect of higher short-term rates could be somewhat offset by quickly rising long-term rates as mREITs benefit from a steeper yield curve and arbitrage the wider spread.
Conventional wisdom dictates that higher interest rates diminish the chances that homeowners will refinance their mortgage rates. Additionally, many mortgage REITs did not anticipate the sharp spike in interest rates and the result was a rash of dividend cuts from REM and MORT holdings.
For a more diversified approach to REITs, investors can tap ETFs such as the Vanguard REIT ETF (NYSEArca: VNQ), the largest REIT ETF.
VNQ “holds a more-diversified group of REITs in hotel, office, residential, and other areas, is also on the verge of an upside breakout, albeit one not as significant. Still, a short-term chart shows that a move through resistance could target last year’s highs and the double-digit percentage gains of the next few months,” according to Barron’s.
For more information on real estate investment trusts, visit our REITs category.