These days, with firms allowing commission-free trading, the retail market for stocks and exchange-traded funds (ETFs) is brisk. Some of our readers might be thinking of investing in real estate stocks. This is simpler than ever to do.
Many people have retirement funds, but don’t know they allow for self-directed investing. Investors can reduce their risks by leaving most of their funds in a professionally managed account, and self-direct their investments in a smaller account with the same brokerage. An adviser at your financial firm can tell you more about how to manage all or part of your retirement account, and how to steer clear of tax triggers. The platforms of the major investment firms are now well designed to warn against common mistakes and alert an investor who is about to purchase particularly high-risk stocks or funds.
Even if you opt to avoid the market or self-directed investing, current real estate investment trends, like evolving generational preferences, have a story to tell about our economy and where it’s headed. Here are some factors to watch.
Influencers: Zillow, Redfin, and the iBuyer Trend
Redfin’s proprietary technology helps agents schedule their showings and communicate with customers. Its site comes up when people search for current estimates of a home’s value. Site visitors are allowed to claim their own home descriptions on Redfin, and update the entries with renovations and photographs — thus continually improving the valuation data.
Competitor Zillow offers a similar valuation feature, called the Zestimate. Zillow is making some moves that could put the company in a strong position going into the future. It’s starting a home property brokerage, Zillow Homes, to buy and sell houses through Zillow Offers. The idea is to compete with home-flipping startup Opendoor, and Redfin is getting in on the action too. More elegantly termed iBuying, this trend has been adopted by mainstream companies, including big names like Keller Williams.
Thinking of investing in iBuyer stocks? As with any stock, research the forecasts before deciding whether and when to jump in, and which company to back.
REITs and the Importance of Economic Stimulus
Real estate investment trusts are popular offerings. They are designed, by law, to pass income through to investors from real estate rentals. REITs offer a popular way to invest in retail and commercial real estate, and earn dividends. They can buy properties from a distressed market, which 2020 certainly provided (more on this below, in our Apartment Stocks section).
But REITs occupy a range of property types, and they vary starkly. To take just a few examples of how this plays out:
- As businesses shift to remote work, REITs focused on leasing traditional office or retail space may struggle.
- Mortgage REITs (exemplified by New Residential Investment, which holds mortgage-related assets) can be lucrative, but note that the REITs most heavily involved with mortgage servicing can face trouble in severe downturns.
- REITs that specialize in cell towers, cloud services and data warehousing, or storage and shipping spaces for goods ordered online might be perfect investments as a new normal takes shape.
REITs have more or less followed the market since the pandemic struck in early 2020. They were battered early on, and have risen in response to most any sign that economic stimulus legislation could be coming. Jerome Powell, chair of the U.S. Federal Reserve, has stated that “recovery will be stronger and move faster“ if federal legislation supports struggling businesses and households.
Rising Stars: Digital Lenders
The government has encouraged homeownership through record-low mortgage rates. Plus, some remote office workers now hope to leave their city apartments and buy homes in suburbia, away from the corporate hubs where they had to live before lockdowns started.
Digital lenders are rising to meet the demand for remote applications. Are the non-bank lending companies too risky to back? Jerome Powell has considered the risks posed by non-bank startups, and observed that since the 2008 financial crisis, federal regulators “have reduced the risk that key non-bank parts of the system would freeze up in the face of market stress.”
Stock prices for Rocket Cos., from Quicken Loans, have fluctuated but remained generally healthy since Rocket’s initial public offering (IPO) in August. California-based loanDepot has a potentially $15 billion IPO coming soon. These public offerings are both responding to and changing the mortgage world, and the stock market. They are worth a look for those wishing to invest in the future of real estate from some of its most agile participants.
Tried-and-true stocks can benefit from home sales and renovations, too. Demand for building and home improvement stocks such as Lowe’s and Home Depot has stayed the course in 2020.
Up and Coming: Drone Stocks
We’re resolutely entering a remote era. Could anything make that clearer than the marketing of drone technology for exterior home inspections and appraisals? The National Association of Realtors® describes drone technology as “an incredible tool for potential homeowners moving to a different city, buying a second home, or trying to streamline the research process necessary to buy a new home.”
Why use drones for home appraisals or insurance inspections?
- Drones can safely assess roofs and other hard-to-reach or hard-to-see property features, with zoom features for closeups.
- Drone technology can be used to glean and share data with no need for on-site visits.
- The drone’s perspective can show access points from various angles and reveal obstructions.
- Drones have unique abilities, like showing heat loss visually.
A number of pure-play drone stocks are offered by foreign exchanges with big conversion fees. But the very popular Nvidia Corp. stock should also benefit, as it produces software used in drones.
Of course, it’s not just drones benefiting from interest in remote appraisals. Audio-visual innovators such as Zoom and Facebook are also attracting investors.
Turbulent Times: Traditional Banks
Low interest rates stimulate lending. But drastically lowered rates pose challenges for traditional banks. When bank customers aren’t receiving much interest on their savings or CDs, those customers look for new places to park their cash.
There are other headwinds, too. In the coming years, we’ll see big banks pressed to compete with online banks. They’ll need to deal with competition from the digital lenders to provide electronic closings for home sales. Expect them to start offering online mortgages — now that a federal standard for remote online notarization is in the works. Already, many deed recorders throughout the United States can record real estate documents digitally. That means stocks such as Docusign and Adobe are gaining heightened attention.
Whether traditional bank stocks are a timely investment remains to be seen. The financial sector as a whole is struggling and will face a reckoning when mortgage forbearance periods are up and defaults set in. Overall, how badly the brick-and-mortar banks have been hit by the pandemic depends on how long their borrowers are financially compromised by the turbulence of 2020. So far, bank stocks have lagged behind a number of other sectors since the initial lockdown periods.
Meanwhile, Apartment Stocks…
Wall Street’s apartment stocks stand to gain big, for unfortunate reasons. Struggling mortgage holders are expected to put numerous homes on the market, then move to rental communities, while home sales are still a hot commodity and they can pull out their equity. This means a “potential bonanza for rental-home investors,” in the words of the Wall Street Journal. Some of these investors formed during the foreclosure crisis of 2008 to buy up the homes.
In short, the new wave of economic distress in 2020 is a boon to the shareholders of American Homes 4 Rent and Invitation Homes.
So, Should You Invest in Real Estate Stocks?
We hope this brief summary of what’s new in the real estate stock sector offers some perspective.
Self-directed investing carries particular risks and may not be appropriate for every investor. Before you get ready to select specific companies in which to invest, take the time to speak with a professional adviser who can guide you in a deep dive through your investment goals, personal circumstances and resources, and help you determine whether self-directed investment makes sense for you.
It’s a volatile market, and there are an increasing number of question marks for the real estate sector. Thorough research and a high level of risk tolerance are needed.
Resources
Clay Jarvis, Wells, Citi and loanDepot Weigh in on COVID-19 Era Mortgage Innovation, Mortgage Professional America (June 2, 2020).
Gillian Tan and Crystal Tse, LoanDepot Considering IPO at Up to $15 Billion Valuation, Bloomberg (Sept. 17, 2020).
Ryan Dezember, Millions Are House-Rich but Cash-Poor. Wall Street Landlords Are Ready, WSJ (Sept. 18, 2020).
Photo credit: Jason Briscoe, via Unsplash.