#$icf

[mitchzacks]

Is a Real Estate Bubble Looming?

U.S. real estate has emerged as a hotspot for foreign investors, particularly China. According to a report by Bloomberg, Chinese property acquisitions in the U.S. jumped from $10 billion in 2011 to more than $55 billion in 2015.[s1]  Additionally, a National Association of Realtors (NAR) study revealed China as the largest foreign buyer of U.S. homes, even surpassing Canada in the last 12 months.

China Seeking Attractive Returns

Chinese investors have been pouring money into U.S. real estate in hopes of offsetting losses in domestic assets. For foreign investors who come from countries with less developed capital markets, less diversified economies and shakier growth, most U.S. assets and debt are seen as safe havens with better yields and higher dollar returns. While China has solid growth, it is lacking in every other department. Additionally, the weakening of the yuan, coupled with lower interest rates outside the U.S., only add further incentive to invest in U.S. properties. The following NAR data shows that China surpasses other foreign buyers in bidding for U.S. homes:

(Source: National Association of Realtors, June 2015 report)

Is a Real Estate Bubble Looming?

With this flurry of international investments, many wonder if the next real estate bubble is on the horizon. In our view here at Zacks Investment Management, it is not believed likely. While the recent Chinese property deals in the U.S. have garnered attention, most are for trophy properties (such as Anbang Insurance Group’s reported deal to acquire $6.5 billion worth of hotel properties from Blackstone Group LP following its $1.95 billion purchase of New York’s Waldorf Astoria in 2015).

Furthermore, foreign investments in U.S. homes are generally concentrated in the upper brackets, and comprise 8% of dollar value of existing home sales as of the last 12 months ending March 2015 (according to NAR reports). Occupying a small slice of a niche market in the still-recovering U.S. real estate market, the chances of Chinese investments resulting in an unsustainable bubble look slim. Moreover, an already strong dollar should rein in some of the Chinese investments in U.S. properties going forward.

Bottom Line for Investors

This year, the value of Chinese acquisition deals in U.S. properties has already reached near half of its 2015 level, according to a Bloomberg report.  The high worth of Chinese investments could bode well for U.S. foreign incomes and may also provide funding for more construction projects – something that’s desired given a tight housing market. It could also result in increased property values of existing homeowners, which adds to personal wealth in the country.

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[andrewthrasher]

Why REITS Looks Interesting To Me

One setup that stood out to me recently was the weekly chart of the Vanguard REIT ETF ($VNQ).  While U.S. equities hit a fresh high last week, REITs are basically flat for 2015. With the recent rise in U.S. interest rates, REITs have seen some rough patches over the last several weeks as REITS have a low correlation to bond yields. In fact, the 60-week correlation between $VNQ and the 10-year Treasury yield is -0.94. I'd call that pretty negatively correlated! However, REITs have still outpaced long-term bonds with the ratio between $VNQ and $TLT sitting near its high from the last two years.

Below is a weekly chart of VNQ going back to mid-2012. It's had a nice up trend and is currently a little less than 10% off its high that was set in 2014. While it began to show signs of a down trend, setting a lower high and then a lower low, price has bounced back and recovered the low from March. This bounce has occurred right at the 50-week Moving Average, which has helped 'define' the up trend over the last several years.

We are also seeing the previous low in the Relative Strength Index (RSI) also holding as support. This is a good sign that momentum may remain in a bullish range and price is in fact not about to start a new down trend. Another momentum tool that I don't show very often on the blog but I've included on this chart is the Williams %R. This indicator is essentially the inverse of the Stochastic Oscillator. It essentially looks at price over a set period of time (16 weeks in this chart) and it's position relative to the highest high over that same period. I find it interesting when the %R breaks below -80 on a weekly chart as it often has been associated with prior lows in price. We saw an example of this most recently last September and before that, December 2013.

If bond yields continue to come off their recent run then we could see the negative correlation to REITs work in their favor as $VNQ recovers and holds above its 50-week Moving Average. But if this slight drop in yield is just a pause and rates keep rising then we may see REITs break this Moving Average support and it's prior 2015 low.

Photo by:  Mark Moz

Disclaimer: Do not construe anything written here as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the article.