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Why the US real estate sector needs a really big boost

Surbhi Jain

Key economic releases this week could impact your ETF investments (Part 5 of 7)

(Continued from Part 4)

The real estate sector

The real estate sector is one of the most followed sectors by the U.S. investing community, especially after the housing bubble of 2008–2009, which took the U.S. economy into the Great Recession. So far, the U.S. economy is still on its path to recovering completely from its 2009 lows.

This week has seen the release of two key economic indicators from the real estate sector.

Pending Home Sales Index

The Pending Home Sales Index is released monthly by the National Association of Realtors as a leading indicator of housing activity. Specifically, it’s a leading indicator of existing home sales, not new home sales. A pending sale is one in which a contract was signed, but hasn’t closed yet. It usually takes four to six weeks to close a contracted sale.

The reading for the month May released on Monday, June 30, with consensus estimates at a 1% month-over-month (MoM) increase in May, considering the subdued 0.4% in the month of April. However, the sector got a big boost with the May reading reflecting a 6.1% MoM increase in pending home sales. Although a part of this jump in numbers could be attributed to the base effect—the April reading being quite low—the numbers do offer a positive indication for final sales of existing homes.

To learn more details about it, read Pending home sales rose but still let down builders like Ryland.

Construction spending

The construction spending indicator is released monthly by the Census Bureau, U.S. Department of Commerce. Construction spending is defined as the dollar value of new construction activity on residential, non-residential, and public projects.

The data for May released on Tuesday, July 1 falling short of market expectations which stood at a 0.5%. Gains in construction spending remained subdued in May at 0.1% compared to an 0.8% gain (revised from 0.2%) in April. Overall, construction spending averaged over the last two months is on a moderate uptrend. April’s upward revision points to improvement in the construction components of second quarter gross domestic product (or GDP).

To understand the importance of this indicator, read Why construction spending is such a big driver in the US.

Investors’ takeaway

These indicators provide a gauge of not only the demand for housing, but also the economic momentum. Businesses only put money into the construction of new factories or offices when they’re confident that demand is strong enough to justify the expansion. The same goes for individuals making the investment in a home.

Popular real estate exchange-traded funds (or ETFs) like the Vanguard REIT ETF (VNQ) with holdings in Simon Property Group Inc. (SPG) and Public Storage (PSA), the iShares Dow Jones U.S. Real Estate Index Fund (IYR), and the SPDR Dow Jones REIT ETF (RWR), reflect the performance of the housing and mortgage market in their returns.

Continue reading the next section in this series to learn about the consumer spending indicators that came out on Monday and Tuesday.

Continue to Part 6

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