This week, we’re dedicating our letter to the recent carnage in US capital markets. Interest rates are on the move, and risky assets are getting clobbered … but what about real estate?
Stocks, Bonds, Crypto, Real Estate – Prices are falling across the board.
In last week’s letter, we discussed the inflation/interest rate environment and my prediction on its impact on real estate. It’s a good primer for this week. You can read it here: I is for Inflation.
From the start of the year through today (January 23, 2022) …
Risk assets have taken a bath … with the QQQ (index ETF representing tech stocks) down 12.5%, while the greater S&P Index is down 8.3%. This means that technology stocks are officially in a correction.
The traditional “flight to quality” isn’t happening, mostly due to inflation and fed action … the 10-year Treasury bond yield has risen from 1.63% to 1.75% (in other words, bond prices are falling). For reference, the 10-year was at 0.93% at the start of 2021.
Cryptocurrency prices are making everyone with an ape as their Twitter profile picture look silly … Bitcoin is down 26.2% on the year, while Ethereum is down 31.5%. So much for being an inflation hedge?
What about real estate?
The real estate market is historically opaque. Unlike stock, your 300 unit multifamily property isn’t repriced every day, so it’s hard to get an idea of its real-time value. The best proxy that I’ve found for real estate sentiment is REIT prices.
Year to date …
- Equity Residential (EQR) is down 3.3%
- Prologis (PLD) is down 5.7%
- Simon Property Group (SPG) is down 8.3%
- Boston Properties (BXP) is down 4.6%
While the above numbers aren’t great, the top REITs are performing far better than the greater stock market. Given that most REITs use long-term debt, their operations won’t be as highly impacted by changes in short-term borrowing costs.
Perhaps REITs are experiencing a flight to quality?
I’ll keep an eye on these trends and report back in future letters. In the meantime, let me know what you think!