A confluence of rising interest rates and low affordability have made the housing market a challenging space for investors, but that doesn’t necessarily mean that capitalizing on the real estate market is completely out of reach, especially with the advent of exchange-traded funds (ETFs) like Hoya Capital Housing ETF (HOMZ).
Hoya Capital Real Estate, a research-focused investment advisor specializing in real estate securities, launched HOMZ on the New York Stock Exchange on Wednesday, making it the first ETF to offer diversified exposure across the entire US housing sector. It’s a refreshing take on real estate investing, particularly after the financial crisis.
Access to Real Estate for Millennials
Furthermore, other trends like the increasing amount of student loan debt is changing the way millennials view home ownership. Student loan debt is causing young Americans to put homeownership on the back burner, according to two papers published by the Federal Reserve.
According to the Federal Reserve, homeownership for adults ages 24 to 32 fell 9 percent from 2005 to 2014 as student loan balances have more than doubled to about $1.5 trillion in the last decade.
“The financial crisis ushered in a new era where households, particularly younger millennials, now hold a far different view of homeownership than past generations, and that’s not necessarily a bad thing at all,” Alex Pettee, CFA, President of Hoya Capital Real Estate, told ETF Trends. “The desire and the need to own real estate remains, but the manner in which households and investors are doing it is changing both because of need and because of innovation.”
Alternate Route to Real Estate Investing
Trade wars in 2018 have also contributed to rising costs for homebuilders, which has tamped down real estate even further. For existing homeowners, this means putting construction projects on hold, preventing them from adding more value to their homes–typically the largest monthly expense for most households.
HOMZ, however, gives current and prospective homeowners another avenue towards real estate investing.
“To the extent that rising housing costs are a core liability for investors, as it is for millions of Americans, we think that HOMZ can be the core asset that addresses this exposure,” said Pettee.
“We think that HOMZ gives investors, not only millennials but anyone feeling the effects of rising housing costs, an opportunity to get their foot in the door by investing in the companies we expect to benefit from rising rents and home values, including many of the companies actually collecting our rent or mortgage checks every month,” added Pettee. “Consistent with this idea of ‘taking back control’ of your housing situation, HOMZ is on a monthly dividend distribution schedule, a rather unique feature for ETFs in the real estate or homebuilding categories.”
Dynamic Core Real Estate Exposure
Unlike real estate, ETFs offer investors the flexibility of liquidity–the ability to buy and sell the asset quickly–something millennial investors will appreciate.
“While not necessarily by design, we think that ETFs have one added benefit for millennials like myself, who are notoriously indecisive, particularly for large purchases or investments: FOMO-protection,” Pettee said. “By virtue of the ETF wrapper, an investor that wakes up the next morning and regrets their purchase can sell it with essentially just a few mouse clicks.”
While investment platforms like crowdfunding have gained in popularity with their ease and ability to raise capital online in order to fund real estate projects, it’s still difficult to beat the ETF as a dynamic investment vehicle.
“With ETF’s you get the all-day tradability, liquidity, and transparency that is not always the case with other investment vehicles, particularly those popular with young investors including so-called ‘crowdfunding’ platforms,” Pettee added.
According to the National Association of Home Builders, the housing market accounts for 15-18 percent of the U.S. gross domestic product (GDP). As such, its influence plays a large part in the broad market and economy in general, but getting exposure to the space is difficult versus other asset classes.
“Housing accounts for roughly a third of annual spending for the average American, but the exposure to housing in the broad-based market indexes is a fraction of this,” Pettee said. “This is particularly true in the real estate categories. When advisors tell their clients they’re allocated to ‘real estate,’ we think the image in the client’s mind is different from what they’re really getting.
“Our clients are shocked to learn that the single largest holding in some of the largest market cap-weighted real estate indexes is not apartments or office buildings. It’s a cellular antenna operator. Followed by a mall owner. This is a problem for many advisors and we think HOMZ helps to alleviate some of those potential issues and awkward conversations between advisors and their clients.”
The residential retail housing market might be feeling the pangs of a slowdown–the National Association of Home Builders/Wells Fargo Housing Opportunity Index shows 56.6 percent of new as well as existing home sales were affordable at the end of 2018 based on standard underwriting criteria–the percentage was 77.5 in 2012. This represents an affordability index that is a 10-year low.
HOMZ, however, seeks to address all aspects of the real estate sector rather than just retail residential. This speaks to the diversification of the fund with respect to the housing market sector.
“Because the index is designed to track total spending on housing and housing-related services across the US, we do think that HOMZ will be attractive to some investors seeking to express a short-term directional view on the US housing market, but HOMZ was ultimately built to be a core, long-term holding within an investors asset allocation,” said Pettee.
Listed on the New York Stock Exchange, HOMZ seeks to track the Hoya Capital Housing 100 Index, a rules-based index designed to track the 100 companies that collectively represent the performance of the US housing sector including home builders, home rental operators, home services and technology firms, and home improvement companies.
Disruption in an Ever-Changing Industry
HOMZ is the first ETF offering from Hoya Capital Real Estate, and its operating in an industry that will continue to be rife with change–something HOMZ is effectively a part of in terms of helping to innovate the space.
“We think that the US housing industry is ripe for disruption and the ripples are just beginning to be felt,” said Pettee. “Forget the 5% brokerage fees and house tours with cookies on the counter Homes are being bought, rented, and sold with a mouse click.
“How about construction? Using modular fabrication techniques, homes are increasingly being built from foundation to completion in time-frames measured in days, not months or years. We believe that HOMZ effectively captures these underlying improvements in efficiency and innovation throughout the sector, but also believe that HOMZ is, itself, part of this innovation.”
For more market trends, visit ETF Trends.