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US Real Estate Slowdown Casts a Long ShadowLast week, U.S. housing starts, a key economic measure of new residential construction, dropped to their lowest level since 2020, with single-family housing starts hitting a 16-month low. Meanwhile, overall housing inventory has climbed to its highest point since 2020, and new housing inventory has reached levels not seen since 2008. Despite a moderating mortgage rate, high prices continue to deter buyers, failing to stimulate housing sales. Combined with the ongoing slowdown in commercial real estate, the sector may face prolonged challenges. While the Real Estate Select Sector could see short-term gains from declining interest rates, a significant slowdown in the sector may dampen these benefits. A long position in Utilities Select Sector Index futures (XAU) to capitalize on lower rates, paired with a short position in Real Estate Select Sector Index futures (XLR) to hedge the real estate downturn, offers a balanced approach against XLR's short-term gains. US HOUSING STARTS TUMBLE, INVENTORY SURGES U.S. housing starts fell to 1.238 million as of July 29, a 6.8% decline from the previous week and well below analyst expectations of 1.340 million. Single-family housing starts dropped by 14.1% to 851,000, marking a sixteen-month low. Although Hurricane Beryl likely contributed to this sharp decline, the real estate sector faces a more significant, underlying challenge. The U.S. housing market is grappling with a surge in inventory. According to Realtor.com, overall housing inventory stands at 884,000, the highest level since 2020. Similarly, data from the National Association of Realtors (NAR) shows inventories at 1.32 million, also the highest since 2020. The situation is even more concerning for new housing inventory, which has reached its highest level since 2008. At July's sales pace, it would take 9.3 months to clear the backlog of new homes. Notably, the slowdown in housing starts has intensified, even as mortgage rates have moderated from their peak in May. Despite a 10% decline in mortgage rates since early May, housing starts have fallen by 8%, indicating that easing rates are not driving a meaningful rebound in housing sales. In addition to the struggles in the residential real estate market, the commercial real estate market continues to struggle with elevated vacancies and mark-downs. Last Month, Deutsche Bank stated that the commercial real estate market would be further pressured during H2 2024 as the recovery they had anticipated was not materializing. INTEREST RATE CUT WILL PROVIDE SHORT-TERM BOOST Despite the challenges facing the real estate sector, upcoming interest rate cuts are expected to provide a boost through further declines in mortgage rates. However, this near-term support may not be enough to offset a potentially prolonged downturn. Rising inventory levels are not being matched by significant price reductions, and with a weakening labor market, homebuyers' purchasing power is likely to remain constrained. The real estate sector is not the only beneficiary of lower rates. As noted by Mint Finance in a previous analysis, the utilities sector also stands to gain from declining rates. Therefore, hedging a short position in Real Estate Select Sector Index futures (XAR) with a long position in Utilities Select Sector Index futures (XAU) mitigates downside risk. The XAU/XAR spread has outperformed an outright short in XAR as well as the SPX/XAR spread during rate cut driven rallies in the XAR this year and remained resilient during the recent rally in XAR. HYPOTHETICAL TRADE SETUP The U.S. real estate sector is burdened by a surplus of inventory, as home buying remains sluggish despite moderating mortgage rates. High prices, combined with financial strain in a weakening labor market, are likely to keep sales low for the foreseeable future. Additionally, ongoing challenges in commercial real estate add to the sector's difficulties. Despite this negative outlook, the real estate sector may still see some benefit from upcoming interest rate cuts. Historically, the spread between Utilities Select Sector Index futures (XAU) and Real Estate Select Sector Index futures (XAR) has shown resilience during such periods, offering an improved reward/risk profile. CME Select Sector Futures serve as a capital efficient instrument to implement spread trades between different sectors. A position consisting of short 3 x E-mini Real Estate Select Sector Futures (XARU2024) and long 2 x E-mini Utilities Select Sector Futures (XAUU2024) balances notional values on both legs. CME provides a 60% margin offset for this trade, reducing the margin requirements to USD 11,940 as of 19/Aug. The hypothetical trade setup described below offers a reward/risk ratio of 1.4x MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme. DISCLAIMER This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services. Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
CME_MINI:XAU1!Long
by mintdotfinance
Long S&P and Short Real Estate on Higher for Longer Rates“The only bad time to buy real estate is later” cites investment wisdom. But, when interest rates soar high, real estate investments can and do hurt. Last week FOMC reiterated its resolve to fight inflation down to its target 2%. Inflation has been stubborn and sticky. It has shown signs of trend reversal towards resurgence. Chair Powell’s made clear that rate cuts may take longer to arrive than anticipated. Elevated rates are restrictive for businesses. It leads to shrinking sales and profits. However, recent earnings show heavyweights posting robust growth. While others have shown disappointing earnings. The difference boils down to the industry and sector. Some sectors fare worse than others. Real Estate is extremely sensitive to rates. Higher rates directly impact mortgages impeding buyers from getting into long-term mortgages. Unsurprisingly, the Real Estate Select Sector index has been the lowest performing sector since the start of the Fed’s rate hiking campaign. Underperformance has continued well into 2024 and has also been observed during periods of market rallies. With sustained headwinds facing real estate, underperformance is likely to continue. This provides suave investors a tactical spread opportunity consisting of a long position in the wider S&P 500 index using CME Micro E-Mini S&P 500 futures and a short position in the CME S&P Real Estate Select Sector futures to harness a reward to risk ratio of 1.5x. FED REAFFIRMS HIGHER FOR LONGER Fed fund rates will remain at 5.25%-5.5% for longer given the stubborn inflation trend over the last 12- months. Forget rate cuts. Those hopes are diminishing. The CME FedWatch signals just two rate cuts this year as of 5/May, down from six expected at the start of the year. Source: CME FedWatch Chair Powell’s speech hinted that even two rate cuts is overly hopeful stating that the expected inflation may not be enough to cut rates this year. HIGHER RATES WEIGH ON REAL ESTATE SECTOR Higher rates adversely impact the Real Estate sector. Elevated rates push up mortgage and financing costs. Large financing costs constrains demand. Last October, the 30-year mortgage rate climbed to its highest level in 23 years at 7.79%. Following that peak, the mortgage rates eased to as low as 6.6% in December as expectations of rate cuts started to firm up. Since then, the rates have rebounded. As of 29/April, the 30-Year mortgage rate average (calculated by Freddie Mac) hovers at 7.22%. A measure calculated by the Mortgage Bankers Association showed that as of 1/May, the mortgage rate continues to rise and is now at 7.29%. Higher rates are forcing housing demand lower. New home sales have declined 5% and existing home sales have fallen by 25% since the rate hiking cycle. Home prices continued to rise despite a slowdown in sales. House price index is almost 10% higher since 2022 as inventory of houses hovers near an all-time-low. COMMERCIAL REAL ESTATE FACES IDIOSYNCRATIC RISKS Commercial Real Estate (“CRE”) has been hit with a double whammy from dwindling office space demand and prohibitive cost of financing. Office space vacancy rate reached a new record high of 19.8% in Q1 2024 as per Moody’s data reported on Bloomberg . Recovery in office space demand remains unlikely in the near term pressing CRE sector down. HYPOTHETICAL TRADE SETUP The real estate sector has been hammered. The S&P Real Estate Select Sector Index is 20% lower since the rate hiking cycle began. The benchmark S&P 500 declined at first but has since recovered and now stands 13% higher. For investors to build a directional short is not prudent as the sector has suffered brutal markdowns. This paper argues in favor of a spread between S&P 500 and the Real Estate Select Sector Index using CME futures. S&P 500/XLRE spread has delivered a stunning 45% outperformance since 2022. Investors can utilize CME Micro E-Mini S&P 500 futures which provides exposure to USD 5 x S&P 500 Index. This is one-tenth the size of standard E-mini futures enabling granular risk management. The CME Micro E-mini S&P 500 futures first launched exactly five years ago on 6/May/2019. The demand for these micro contracts has spiked. In April 2024 , these contracts witnessed an Average Daily Volume of more than one million contracts which represents 15.7% YoY growth and 22.7% MoM growth. Micro futures allow for smaller position sizes. It broadens market access and allows for granular and effective hedging by matching notional values closely in spreads. This hypothetical trade consists of a long position in 2 lots of Micro E-mini S&P 500 June futures (MESM2024) with a notional size of USD 51,615 (= 2 (number of contracts) x USD 5 (contract size) x 5161 (index value) ) and a short position in 1 E-mini Real Estate Select Sector futures (XARM4) with a notional size of USD 45,500 (= 1 (number of contracts) x USD 250 (contract size) x 182 (index value) ). Consider the two scenarios which can lead to a shift in the spread ratio: 1) S&P 500 rises from 5161.5 to 5408.6 while Real Estate Select Sector index remains unchanged at 181.8. The ratio becomes 5408.6/181.8 = 29.75. The overall profit, which comes entirely from the S&P 500 position would be (5408.6 – 5161.5) x 5 x 2 = USD 2,471. 2) S&P 500 remains unchanged at 5161.5 while Real Estate Select Sector index falls from 181.8 to 173.5. The ratio becomes 5161.5/173.5 = 29.75. The overall profit, which comes entirely from the Real Estate Select Sector index would be (181.8 – 173.5) x 250 = USD 2,075. • Entry: 28.5 • Target: 29.75 • Stop Loss: 27.5 • Profit at Target: USD 2,471 • Loss at Stop: USD 1,620 • Reward to Risk: 1.53x MARKET DATA CME Real-time Market Data helps identify trading set-ups and express market views better. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs www.tradingview.com DISCLAIMER This case study is for educational purposes only and does not constitute investment recommendations or advice. Nor are they used to promote any specific products, or services. Trading or investment ideas cited here are for illustration only, as an integral part of a case study to demonstrate the fundamental concepts in risk management or trading under the market scenarios being discussed. Please read the FULL DISCLAIMER the link to which is provided in our profile description.
CME_MINI:MES1!Long
by mintdotfinance
DRV a triple leveraged Real Estate ETF LONGDRV as a ETF of real estate stocks is likely somewhat responsive to the financial environment. My idea is that the recent rate hike of 0.25% will adversely effect home sales and liquidity especially given that the Fed has indicated that there will be on easing this year but perhaps some pauses. They take August off for the conference and party. The 2H chart shows price moving down from a high pivot in May. The zero-lag EMAs ( 35/70/280) are golden crossing. The MACD confirms that upward divergence.On the dual time frame RSI, the low TF green line has jumped up and looks solid. I will take a long swing trade here zooming into the 15-30 minute TF for an entry. I will also look at the options chain seeking an option expiring in 203 months reflecting a target of 48 between the POC line of the volume profile and the mean VWAP thick black line. I like to catch revesals early to profit from the bulk of the move. This is another opportunity.
AMEX:DRVLong
by AwesomeAvani
OPEN OpenDoor a Penny Real Estate LONGOPEN has earnings upcoming on 8/3. An analysis of the 4H chart with overlays shows bullish momentum in the set of zero lag EMA lines as well as upgoing anchored VWAP landlines. Price crossed over the mean VWAP ( thin black) and the POC line of the volume profile one month ago. The MACD shows bullish momentum since July 24th. The dual RSI indicator shows the low time frame green line rising and then crossing the steady higher black time frame line the past trading day and both being at the 60 level. OPEN is a long trade setup with earnings around the corner. I will take it.
NASDAQ:OPENLong
by AwesomeAvani
OPEN breaks out. Can it continue?OPEN a disruptive company in the residential real estate sector as shown on the 1H chart has continued out of a pullback. Is the continuation sustainable? I believe that inflation has become imbedded into the economy. Banks have survived the crisis with federal support and action. The Z score and relative trend index are impressive with the present indications. In an abundance of caution, the mass index is approaching the reversal zone above and could be somewhat predictive of a potential reversal. Moreover, the anchored VWAP lines with an origination ten trading days back shows price at three standard deviations above the mean VWAP. Overall, I believe that I should not enter a long uptrend this far into its extension when there are signs based on technical indicators. Instead, I will watch for another pullback or actual retracement.
NASDAQ:OPEN
by AwesomeAvani
Getting caught in the interest-rate trapThe low interest rates set by central banks in recent years have led to a real estate boom in the U.S. and Europe, but as interest rates begin to rise rapidly, banks and real estate companies may become insolvent. The commercial real estate market is in shock and transactions are not as frequent. The high prices of real estate will have to fall until rental yields are in line with interest on debt. This will result in losses for investors and investment vehicles lured into the market by low interest rates. The situation is particularly dire in Europe, where interest rates are even lower than in the United States. Real estate companies are experiencing financial difficulties, with the Stoxx 600 Real Estate Index losing 40% last year. Many companies' bonds are now trading as junk, despite having investment-grade ratings. Germany's Vonovia is one such company, with a rental yield of just 3% and refinancing costs of over 5%. This means that the company is paying more to refinance its debt than it is earning in rental income, which is not sustainable in the long term.Many real estate funds are also affected, including Blackstone's B-REIT, which has seen significant redemption requests. Banks are also in trouble because they have a lot of loans to commercial real estate companies that are unlikely to be repaid. They also have a problem with residential mortgages, because if property values fall and people lose income in a recession, they may not be able to pay back their loans. In addition, people are moving their savings out of banks and into government bonds and money market funds that offer higher interest rates, putting banks in a difficult position. Bad news: The banks are completely caught in the interest rate trap: if they raise deposit rates to keep savers, their already measly interest margin shrinks and they lose money every day. If they do not raise deposit rates, the bank run continues and they risk becoming illiquid like Silicon Valley Bank and Credit Suisse. So it looks like another credit crunch similar to the 2008 financial crisis. Banks are cutting back on new lending, which is causing lending to fall sharply and exacerbating the credit crunch among over-indebted companies. This, in turn, increases the likelihood of bankruptcies and forced sales. Interest premiums on new loans and bonds rise, leading to a self-reinforcing downward spiral. The eventual demand for government and central bank intervention will ultimately be paid for by the general public. The bottom line: It feels like the financial sector is lurching towards a new crisis, lured into the trap of more than a decade of measly interest rates and years of bad investments of capital. In my view, shares of banks from all former low-interest countries are currently not worth investing in, no matter how favourable their valuations may look. The extent of the damage can hardly be estimated at the beginning of the crisis and total losses are imminent. But also stocks of other companies, which have more or less fixed income for a longer period of time and have to finance themselves on the capital market at higher interest rates in the short term, are red-hot - above all real estate companies or infrastructure investments.
AMEX:XLRE
by ReallyMe
Trade Idea: VICIVici properties is showing weakening in its trend. This has been directly tied to the weakness in XLRE - real estate We believe VICI properties has much more downside. This specific Real estate play also has much property exposure to the casino type names. With many of the Casino charts like MGM, LVS looking "topheavy" this may be a correlated play that already has headwinds from the weakening in real estate. If the economy weakens to a degree the consumer discretionary stocks should also be hit.
NYSE:VICI
by Trading-Capital
Real estate topping? Price to fall to mid-30s to low 40s?While everyone is bullish real estate, the chart says price is likely to turn bearish. As you can see from the chart, we just retested and rejected a long term bullish trendline, and now with that rejection, it sets up the chance for price to fall much lower from here. The first supports are in the low 40s, and if we end up breaking that, we'll likely fall to the 50% retracement region in the mid to upper 30s. Let's see what happens over the coming weeks/months.
AMEX:XLREShort
by benjihyam
O (Realty Income Corporation) - Bearish Multiple Top - DailyO (Realty Income Corporation) stock price has reached a two-year, all-time-high resistance zone of $72.56. If resistance holds strong, the stock price could pullback over time to test support below. O (realty income corporation) reports earnings on 05/04/2022. Entry (short): $71.56 Profit Target +4% (exit): $68.59 Stop Loss -2% (exit): $72.91 Utilize stop loss, position sizing, risk management. Note: XLRE real estate ETF has also begun to pullback on a daily chart. All content is Not financial advice. Trade at your own risk.
NYSE:OShort
by NoFomoCharts
PLD (Prologis) - Bearish Double Top Before Earnings - DailyPLD (Prologis) stock price has double-topped below $169 resistance on the daily chart. A bearish pullback is possible, if support levels are broken to the downside over time. PLD (Prologis) reports earnings on 04/19/2022. Utilize stop loss, position sizing, risk management. Entry (short): $165.33 Profit Target +7% (exit): $153.74 Stop Loss -3.5% (exit): $171.15 Note: XLRE real estate ETF has also begun to pullback on a daily chart. All content is Not financial advice. Trade at your own risk.
NYSE:PLDShort
by NoFomoCharts
Classic Cup & Handle patternWe are seeing a cup & head pattern on this real estate ETF. How to enter a position: First entry: 20% of full amount, when it breaks the high of the handle of the cup. Second entry: 80% is the cross above the high of the cup, confirming the bullish pattern. Risk-reward setup: Profit-exit: Full target is $53 approximately. 10sma has been working well with a trailing stop for a partial sell. Loss-exit: the target is denied, if we close below the november 1st low; at which point I would exit 100%. Good luck, and have a great weekend everyone!
AMEX:XLRELong
by dorfmanmaster
RE - Real Estate Double Top Before FOMCIdea for Real Estate: - Real Estate testing a double top after some exhaustion Sept-Oct. - MBB's rolling over, rejected at -1 Std Dev: - Because every other market component is already at +2/-2 Std Dev, and Real Estate is relatively less volatile than say S&P 500, I think the +1/-1 Std Dev is a good signal. - We will have more confirmation next week depending on Fed's decision to taper MBS purchases. I think the Fed will stick to their signaled schedule in hopes of avoiding any sort of a "tantrum". - Historically, RE and MBS's lead declines in equities. - We have seen both commodity prices, Building Permits and pending Home Sales come down, so a decline is natural: - Overseas property market declining is likely to have headwinds as well: GLHF - DPT
AMEX:XLREShort
by UnknownUnicorn1043646
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