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Weakness in Real Estate Sector is Perfect Setup for ‘DRV’ ETF

This article was originally published on ETFTrends.com.

The latest round of Chinese tariffs took effect yesterday as the United States and China continue waging their seemingly endless tariff-for-tariff war, which is set to increase the cost of homebuilding and thus, affect homebuilder ETFs like the iShares US Home Construction ETF (ITB), SPDR S&P Homebuilders ETF (XHB) and the Invesco Dynamic Building & Construction ETF (PKB) . However, one ETF that could stand to benefit from this weakness in homebuilders could be the  Direxion Daily MSCI Real Est Bear 3X ETF (DRV) .

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.

Homebuilders Suffering

As it currently stands, the housing market is already feeling the pangs of rising interest rates crimping homebuyer enthusiasm to take on financing to purchase real estate. Additionally, once Hurricane Florence is done unleashing its fury, the cost to rebuild homes will increase as tariffs have elevated the costs of construction--materials like lumber, steel and aluminum as well as U.S. tariffs on $200 billion in Chinese imports like countertops and furniture could increase construction costs 20% to 30%.

Existing homeowners wishing to perform renovations will also feel the proverbial pain in their pockets. As such, they will seek ways to curb costs or even abandon plans for renovations altogether.

In the latest tariff-for-tariff war, U.S. President Donald Trump moved forward with imposing a 10% tariff on $200 billion worth of Chinese goods that includes a step-up increase to 25% by the end of the year. It took less than 24 hours for China to respond to the latest salvo of tariffs fired off by the Trump administration as Beijing announced it will impose $60 billion worth of tariffs on U.S. goods, which took effect yesterday--this countermove is said to affect a list of 5,207 products within a range of 5 to 10%.

Both the U.S. and China have already slapped each other with tariffs worth $50 billion total. There was news that both sides were engaging in low-level negotiations to ameliorate their trade disputes, but talks have reportedly stalled.

Related:  Dow Stumbles as U.S.-China Trade Talks Stall

Even if a homebuilder does decide to take on a project, the increased costs eventually get passed on to the consumer, translating in higher real estate prices that will further affect the real estate market. Despite the extended bull market in U.S. equities, real estate has still been lagging the rest of the capital markets.

“In the short term, it is definitely hurting us,” said Skip Greene, a contractor in Kinston, N.C. “I hope that going through all this pain is worth it in the end. We’ve got a tariff war going on with China and Canada, and the result was that I couldn’t move ahead with building affordable housing.”

Just last week, 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."

Existing Home Sales Peak

There is further weakness exhibited in the real estate sector as Bank of America said today that existing home sales, the largest segment of the housing market, have peaked and will no longer be an impactful contributor to the growth of the U.S. economy.

"We are calling it," the Bank of America team led by Michelle Meyer said in a research note on Friday. "Existing home sales have peaked."

"The peak in existing home sales can largely be explained by the decline in affordability," added Meyer.

While this all spells doom and gloom for the real estate market, for savvy investors looking to fade real estate, DRV could be the play as the sector begins to show signs of unraveling.

For more real estate trends, visit ETFTrends.com

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