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Must-know outlook for homebuilders and REITs like Annaly

Brent Nyitray, CFA, MBA

Must-know outlook for homebuilders and REITs like Annaly (Part 2 of 6)

(Continued from Part 1)

Last week was a very data-light week

Last week was very sparse, data-wise. We had no data until Wednesday, and for the most part all of the reports were secondary, non–market moving data points. Probably the most important data point was the Chicago Fed National Activity Index, which came in lower than expected. Retailers also are beginning the earnings season and have been reporting disappointing earnings, except for the luxury end. Both Home Depot and Lowe’s reported disappointing earnings.

Commercial REITs will be encouraged by economic strength

Commercial REITs in the retail space, like Simon Property (SPG) and General Growth Properties (GGP), will certainly be disappointed in the Chicago Fed National Activity Index, as the notoriously volatile index took a turn into negative territory. That said, the three-month moving average was positive, which means you can’t read too much into the number. Office REITs like Vornado Realty Trust (VNO) will undoubtedly focus on the index of leading economic indicators, which shows the economy is still strengthening, notwithstanding the weak April data.

Implications for mortgage REITs

Mortgage REITs, like Annaly (NLY) and American Capital (AGNC), are driven by interest rates, which have been in a tight trading range. Investors are becoming more comfortable with the idea that the Fed isn’t looking to raise rates too soon (people seem to have digested the possibility, although it’s probably unlikely, that the Fed will start hiking rates at the June 2015 FOMC meeting). Last week, we heard from Annaly Capital, which reported lower-than-expected earnings.

Implications for homebuilders

Homebuilders like PulteGroup (PHM) and D.R. Horton (DHI) will focus on the macroeconomic data as well as the existing home sales and new home sales numbers. Both the existing home sales and new home sales numbers imply that the inventory shortage we’re seeing in the real estate market isn’t going to change any time soon.

Continue to Part 3

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