As a percent of household spending, housing costs are now a third of spending for the average American according to the Consumer Price Index, up from around 15% back in the 1950s and it’s certainly not uncommon to hear of millennials in major metro areas paying upwards of 50-60% or more of their average annual income towards rents. Housing costs are the largest single expenditure category for the average American household and we don’t see that changing anytime soon.
While housing is 33% or more of average household spending, housing and real estate represent less than 5% of the weight of the S&P 500. Because housing and real estate has such a high percentage of private ownership, they are tremendously under-represented in the traditional stock indexes. For investors in a simple S&P 500 portfolio, that a huge mismatch between the asset side of the investor’s balance sheet and the liability-side, particularly for renters who lack the direct exposure to housing. This is one of the shortfalls of market-cap weighted indexes- put simply, they are reflecting what’s happening on “Wall Street” while indexes like HOMZ are representing what’s happening on “Main Street.”
By tracking an index designed to capture total spending on housing and housing-related services across all housing categories – home building, rental operations, home improvement, and services and technology – we think that HOMZ captures these trends affecting the housing market. At the household-level, rising housing costs affect nearly every American in some way, but renter households are particularly exposed. Considering that housing costs represent such a significant percentage of total household spending, we think that the ability capture or perhaps “hedge” rising costs represent a core investment need.
4. How do existing REIT ETFs fail to accurately represent the performance of the US Housing market?
Before HOMZ, there were REIT ETFs and then there were Homebuilder ETFs, and the each operated in their own investment universe. Each represents a relatively small slice of the broader housing market. No ETF viewed the US housing market – arguably the most important asset class in the world – as a distinct investible sector at the ETF-level. Again, we felt that this reflects the lack of innovation and adaptation to the investor-driven asset allocation.
The REZ, a residential REIT ETF has been among our favorite ETFs for many years. We’ve written research reports on it, and noted the absolutely phenomenal performance relative to the broader REIT index – it’s outperformed by a wide margin on essentially every recent measurement period. During the index development process, through backtesting we discovered that the source of this performance was driven not by the particular index construction or holdings, but rather by the tailwinds driving the performance of the housing sector- notably the trends of limited supply and strong demand driving ‘real’ growth in housing costs. We discovered that adding in other non-REIT housing components to the index, weighted at the GDP level to track total spending on housing and housing-related services, led to even better risk-adjusted performance than an index of REITs alone. And because this naturally leads to a more relatively more tax efficient and growth-oriented index, we felt that there was a very clear rationale for creating the Housing 100 index.
Additionally, 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. Followed by another cell antenna operator. This is a problem for many advisors, especially when these non-core sectors are underperforming. We think HOMZ helps to alleviate some of those potential perception issues between advisors and their clients, as HOMZ is more representative of client’s real-world interactions with the real estate market.
5. How do existing Homebuilder ETFs fail to accurately represent the performance of the US Housing market?
At the homebuilder level, we have always wondered how homebuilder ETFs came to represent the entire US housing market, considering that they represent such a small slice of total housing market activity. Perhaps because there was simply nothing else at the ETF-level until the launch of HOMZ, the media has always used XHB and ITB as proxies for the performance of the housing market despite the fact that these ETFs almost exclusively capture the single family market – essentially ignoring the other 40% of the housing market – but also focus only on one component of the market: new construction. There is no Zillow, Redfin, RealPage, or Corelogic, all companies that are really on the front-lines of the housing industry.
With more awareness around the impact of rising housing costs and the real-world exposure that investors face, I think that advisors will see HOMZ as a core piece of an asset allocation to address the actual practical exposures that their clients face. HOMZ combines not only residential REITs and homebuilders, but also the housing-related categories that are nowhere to be found in either realm, most notably the emerging real estate services firms like Zillow, Redfin and CoreLogic. For these reasons, we believe that HOMZ provides a modernized and highly intuitive evolution in the homebuilding and real estate categories and we’re really excited about it’s potential.
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