Is the air finally coming out of ballooning real estate values? If trading activity in the Direxion Daily MSCI Real Estate Bear 3X ETF (DRV) is any indication, then values could be coming back down to earth.
The triple leveraged ETF is up about 32% to start the year. Real estate values have been skyrocketing since the pandemic hit, pricing out a number of prospective buyers in the market for a home.
Rising interest rates could also be a prime factor that traders are looking at when considering the real estate market in 2022. Demand for homes could subside with the effect of rising rates amid the Federal Reserve’s tightening monetary policy.
If a bearish real estate market is ahead, then DRV is an option to consider. The fund seeks 300% of the inverse of the daily performance of the MSCI US REIT Index, which is a free float-adjusted market capitalization-weighted index that is comprised of equity REITs that are included in the MSCI US Investable Market 2500 Index.
A Hawkish Fed Equals Rising Mortgage Rates
While the capital markets are expecting the Fed to raise rates, it also depends on how hawkish they get. In effect, this should translate to rising mortgage rates, which could further tamp down real estate demand and drive gains for DRV.
“Mortgage rates snapped upward in January as mortgage investors realized what the Fed intends to do, which is raise interest rates aggressively this year,” said Holden Lewis, home and mortgage expert at NerdWallet. “Now, mortgage rates are rising more gradually as markets wait for the Fed to clarify their timetable.”
“For perspective, the 30-year mortgage averaged 4.09% in the 2010s and 12.71% in the 1980s, people bought plenty of houses in both eras,” said Lewis.
Market experts have varying predictions on what mortgage rates may look like in the future. Bankrate’s chief financial analyst Greg McBride, for example, is forecasting the benchmark 30-year mortgage rate to fall between 3.65% and 3.85%.
“The bulk of these rate increase moves were made in January as markets reset their expectations on the Federal Reserve. Moves in the next few weeks, however, should be more subdued,” said McBride.
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