If you think the consistent drop in home sales is bad – including the most recent 3.4% decline in May – think again: June and July numbers will be even uglier as mortgage rates continue to rise following interest rates hikes.
That’s the assessment of David Auerbach (pictured), managing director of Armada ETF Advisors and a 20 years-plus veteran of the REIT (real estate investment trust) industry. While keeping an eye on the housing industry as so many others are doing amid prevailing volatility, Auerbach readily acknowledges the industry’s woes are benefiting his line of business. Armada invests in publicly traded REITs, which in turn make investments in income-producing real estate. By packaging REITs in an exchange-traded fund (ETF), the company provides diversified real estate exposure via a liquid, tax-efficient and easy-to-access vehicle.
“We have seen the data that came out showing the weakness that’s out there,” Dallas-based Auerbach told Mortgage Professional America in a telephone interview. “In the same breath though, we’re not really surprised by it because obviously interest rates are up which means mortgage rates are up, affecting the average consumer. The problem is twofold: What I call affordable inventory doesn’t exist. There’s a lack of supply of affordable inventory, which plays into why we see that weakness. Some of those homes aren’t being listed for sale right now, or the people listing those homes have already transacted. The higher-end stuff is a mixed bag: Because of this capitulation of the stock market, the guys that are in the market for the multimillion homes aren’t as receptive right now because their portfolios have taken a hit.”
Interest rates are most certainly expected to go up further as the Fed tries to tame inflation, which will lead to higher mortgage rates in the future, Auerbach noted. Despite the challenges, this won’t be a repeat of the Great Recession, he asserted.
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“It is going to get worse,” he said. “We already know it’s getting worse even before we have the Fed raising its interest rates next month more than likely, which means that mortgage rates are going to go up even more. We have to understand this is a whole different environment than what happened in 2006 or the 2008, 2009 crash when you made $70,000 and wanted a $750,000 house – approved! Today, we don’t have that issue. We were spoiled for so long in a 0% interest rate environment in the world of what I call free money. Because we’re in a different environment home price appreciation has gone up.”
Given Armada’s focus, the company is benefiting even as the housing market reaches an inflection point, Auerbach acknowledged. “We have the only active residential REIT ETF that’s on the market, so our focus in on apartments, single-family rentals, manufactured housing and senior housing,” he said. “So, playing into all this craziness that’s in the housing market right now, from where we sit – topsy turvy or not – a resident or a tenant is going to do anything and everything in their power to let their spouse or their kids have a roof over their head every single night that they go to sleep. And if I can’t buy that affordable house, I’m going to go rent that house; if I can’t rent that house, I’m going to go rent that apartment; and if my landlord says my rent is going up to a certain amount I can’t afford, I’m going to pack my things and move my family to another apartment.”
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Armada last month partnered with Tidal ETF Services LLC in launching the Home Appreciation US REIT ETF as the first active pure-play US residential real estate exchange-traded fund. The fund invests in publicly traded REITs that derive their revenue from ownership and/or management of residential properties. “Our fund owns 25 to 30 publicly traded stocks that are residential REITs that own those various property types,” Auerbach previously explained, noting that investors gain “fractional ownership” of such properties by virtue of their investment.
At least for the time being, such investments yield a good alternative as even the idea of a “starter home” becomes increasingly elusive, Auerbach suggested. “The price tag is going up because the average home that’s on the market has shot up because of appreciation and the new inventory that’s coming on line is pretty much out of reach for the average investor. You know that term ‘starter home’ – that $300,000 home or whatever it was back in the day – it doesn’t exist anymore because that’s being acquired by the single-family rental players.”
