Why the 2nd quarter economic revision affects REITs like Vornado

Market Realist

Don't be fooled—this short week means lots of important releases (Part 2 of 6)

(Continued from Part 1)

The second revision to second quarter GDP

The biggest number last week was the revision to second quarter GDP (the second revision) to +4.2%. This number is a strong rebound from the -2.9% print for the first quarter.

In real estate, we had a number of important reports, starting with new home sales, which came in below Wall Street expectations. Home price indices like the FHFA Home Price Index and Case-Shiller showed home price appreciation is beginning to decelerate. Finally, pending home sales rose more than expectations. But we’re still down year-over-year.

A lack of inventory has been the story of the real estate market, and most of these indicators bear this out.

Commercial REITs will be encouraged by economic strength

Commercial REITs in the retail space, like Simon Property Group (SPG) and General Growth Properties (GGP), focused primarily on the personal income and personal spending data on Friday. Personal spending fell, but that was primarily due to lower energy prices.

Office REITs like Vornado Realty Trust (VNO) and Boston Properties (BPO) focused on the GDP report, which showed the economy bounced back strongly in the second quarter.

Implications for mortgage REITs

Mortgage REITs, like Annaly (NLY) and American Capital Agency (AGNC), are driven by interest rates. Rates have continued to move lower. This has surprised many strategists and analysts who were predicting the end of quantitative easing (or QE). They thought the proximity of rate increases would move long-term rates higher. But that simply hasn’t happened.

Implications for homebuilders

Most builders have already reported. The only one left is luxury builder Toll Brothers (TOL). We already know the high-end buyer is doing just fine.

New home sales were a disappointing number. But we’re entering the seasonally weak period for the builders. For them, 2014 is more or less already in the books.

Continue to Part 3

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