Real estate stocks edge down, while major market averages gain marginally

Real estate stocks edged down in the week ended June 21 after a mixed economic data and the latest housing market update, while the major market averages gained marginally.

The Real Estate Select Sector SPDR Fund ETF (NYSEARCA:XLRE) ended the holiday-shortened week 0.13% lower at $38.48. The fund posted gains in two out of the four sessions, as the markets see the May inflation data encouraging, but realize that the disinflation process may take longer.

The Federal Reserve held rates steady, but central banks across Europe continue to cut interest rates. The Swiss National Bank trimmed its key benchmark rate by 25 basis points for the second time this year, after becoming the first major economy to start an easing cycle back in March. The European Central Bank has followed with a rate cut of its own.

"Markets also received a three-course housing market update which painted the picture of a sector that remains rocked by higher interest rates," Wells Fargo said, adding that much of the week's disappointing data were concentrated in interest-rate sensitive sectors.

Housing Starts dropped 5.5% month-over-month in May to 1.277M, well below the 1.373M consensus, from 1.352M in April. Building Permits declined 3.8% to 1.386M, missing the 1.450M consensus, from 1.440M in the prior month. Existing home sales came in at 4.11M in May, compared with the 4.08M consensus and 4.14M in April.

Despite the pullback in sales, home prices climbed. The national median sales price reached $419,300, an all-time high on records going back to 1999. "It's somewhat of a strange phenomena," said Lawrence Yun, the National Association of Realtors' chief economist. "We had low home sales activity, prices are hitting record highs and homes look like they're still getting multiple offers."

FTSE Nareit All Equity REITs fell 0.28% from last week, while the Dow Jones Equity All REIT Total Return Index declined marginally by 0.03%. Meanwhile, the broader S&P 500 advanced 0.61% to end at 5,464.6 points.

Sentiments

The NAHB/Wells Fargo Housing Market Index declined for the second month to 43 in June, vs. 45 consensus, from 45 in May, as mortgage rates continue to hover in the 7% range along with elevated construction financing costs. The index represents homebuilder sentiment.

"Maybe the Federal Reserve interest rate cut policy, which was projected to happen, but did not happen — it's getting delayed and delayed and delayed —- maybe that's causing the home sales recovery to be delayed," Yun said.

Seeking Alpha's Quant Rating system grades The Real Estate Select Sector SPDR Fund ETF a Sell, with a score of 1.99 on a scale of 5. The fund's Momentum is rated D+, Expenses A, Dividends C-, Risk D+ and Liquidity A+. Meanwhile, SA analysts assign it a Buy rating.

REITs are popular among investors, especially those seeking higher yields in the stock market. The ETF holds all REITs in the S&P 500, presenting a mixed technical picture with potential for substantial gains post-Fed easing. The top 5 holdings in XLRE are profitable but overvalued, while the REIT sector offers growth potential in various sub-sectors, SA author Sungarden Investment Publishing said.

Real estate is among the five defensive sectors that J.P. Morgan analysts feel bullish about. The sector was among the worst three performers in the first quarter. In the second quarter, this has changed. Quarter-to-date, these sectors have driven a 10% performance recovery, the analysts said.

The fund saw net inflows worth $27.02M this week, up from $4.06M in the previous week, data from the information solutions provider VettaFi showed.

XLRE is trading 3% above its 200-day simple moving average, but ~4% down from the beginning of the year.

Subsector Performance