The state of the housing market os a hot-button topic for investors as mortgage rates keep climbing and a glut of homes is starting to show up as buyers hit the brakes.
Last week, existing-home sales marked an eight-straight monthly fall, the first such streak since 2007. That’s as a recent UBS survey showed five big U.S. cities featured as overvalued.
Our call of the day from Baron Real Estate Fund BREFX,
Read: Real estate names lead U.S. stocks higher as yields pull back
So much so, that if the current downturn leads to a recession, real-estate companies will be at a good starting point, Kolitch said in his recent third-quarter shareholder letter. And while he’s wary about the near term, thanks to central-bank hikes and political risks, he’s more optimistic about the two-to-three view.
Over the first nine months of 2022, many real-estate companies have seen 30% to 60% corrections that have factored in low valuation multiples and expectations for slower growth, said Kolitch, adding that their fund is now “chock-full of real-estate stocks that are unsustainably cheap.”
Kolitch is optimistic due to strong business fundamentals and healthy balance sheets he sees for many companies, along with signs of hope for the overall economy — moderating inflation, plentiful jobs, central bank hiking that’s likely mostly done and a China rebound that’s just getting started.
He also notes that they’ve seen no signs of excessive use of leverage and overbuilding that marked the housing bust of 2008. “We always have our attenae up for warning signs in the real-estate sector,” he said.
Onto his “best-in-class” picks, which must meet criteria that includes: ownership of unique and well-located assets in markets with high barriers to entry, strong long-term growth prospects, sector leaders, conservative and liquid balance sheet and solid management.
Looking at real-estate investment trusts (REITs), Kolitch highlights Invitation Homes INVH,
Global carrier and cloud-neutral data center operator Equinix EQIX,
Among residential-related picks are some familiar names, including home builders Lennar LEN,
Among alternative asset managers, Kolitch notes Brookfield Asset Management BAM.A,
Under the travel-related real estate umbrella, the manager likes casino group MGM Resorts International’s MGM,
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The chart
How sticky is high inflation? A team of strategists at Deutsche Bank, led by Jim Reid, have taken a look at consumer price inflation from 1920 (where available) onward for 50 developed and emerging market countries, when inflation reaches 8%.
“Looking at this full history, the evidence shows that once inflation spikes above 8%,
median inflation takes around 2 years to even fall beneath 6%, before settling
around that level out to 5 years after the initial 8% shock. This is around 2pp above
the pre-shock median of c. 4%,” said the strategists. U.S. CPI hit 8.5% in March.
As they point out, current consensus expects inflation to be back or even below 3% just two years after that first breach of 8%. While “history never repeats exactly,” when inflation normally breaches these thresholds, history shows it’s fairly sticky, especially in post-1970 periods,” said Reid and the team.
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