Real Estate Doldrums Could Benefit Leveraged Bear ETF, Hurt Hombuilder ETF

A rising rate landscape continues to rock the foundations of the real estate sector, particularly when it comes to homebuilders, which could benefit the Direxion Daily MSCI Real Est Bear 3X ETF (NYSEArca: DRV), but put persistent downward pressure on the Direxion Daily Homebuilders and Supplies Bull 3X Shares (NYSEArca: NAIL).

With 30-year mortgage rates already surpassing the 5% mark, the cost to finance a home is getting more expensive, clamping down a housing market that has been lagging even as U.S. equities were in the midst of a historic bull run. Compounding the issue is the benchmark U.S. Treasury yield on the 10-year note reaching a new seven-year high.

“It already is affecting housing. Every basis point rate rise already is affecting housing. The run-up in rates over the past year is now weighing increasingly heavily on single-family housing demand, particularly since housing prices have risen so much,” said Mark Zandi, chief economist at Moody’s Analytics. “Affordability is now an issue for many potential home owners. Home sales have gone sideways since the beginning of the year and house price growth is now slowing in many markets so it’s already doing damage. Some of the weakening is due to the tax effect in markets where the deduction was critical.”

DRV seeks daily investment results equal to 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. DRV invests in swap agreements, futures contracts, short positions or other financial instruments that, in combination, provide inverse or short leveraged exposure to the index.

The effect of rising rates could also be felt in homebuilders as NAIL was down 6.43% as of 2:45 p.m. ET with possibly more pain to come as the tariff war between the United States and China continues to escalate. seeks daily investment results equal to 300% of the performance of the Dow Jones U.S. Select Home Construction Index.

Related: Rising Rates Chase Investors From Big Real Estate ETF

Homebuilders Feeling Effects of Tariffs

The latest round of Chinese tariffs could increase the cost of homebuilding and thus, affect homebuilder ETFs like the iShares US Home Construction ETF (BATS: ITB), SPDR S&P Homebuilders ETF (NYSEArca: XHB) and the Invesco Dynamic Building & Construction ETF (NYSEArca: PKB). Last month, J.P. Morgan lowered its rating for five homebuilders, citing cautiousness in the sector.

“We are becoming more cautious on the homebuilding sector,” analyst Michael Rehaut said in a note. “We expect the housing recovery to remain fairly tepid in 2019.”