Housing Prices vs. REITs
FHFA is the federal agency regulating Fannie Mae, Freddie Mac, and 12 Federal Home Loan Banks. The index below represents home sales throughout the U.S. NAREIT is a real estate investment trust trade group. The index is comprised of all publicly traded equity REITs in the U.S.
Home Prices vs. REITs
FHFA Index | REIT Index | REIT Index | |
1994 | 1.3% | 3.2% | |
1995 | 4.6% | 15.3% | |
1996 | 2.7% | 35.3% | |
1997 | 4.6% | 20.3% | |
1998 | 5.0% | -17.5% | |
1999 | 4.9% | -4.6% | |
2000 | 7.2% | 26.4% | |
2001 | 7.3% | 13.9% | |
2002 | 6.9% | 3.8% | |
2003 | 7.0% | 37.1% | |
2004 | 10.4% | 31.6% | |
2005 | 11.1% | 12.2% | |
2006 | 4.7% | 35.1% | |
2007 | -0.4% | -15.7% | |
2008 | -4.9% | -37.7% | |
2009 | -4.3% | 28.0% | |
2010 | -1.3% | 28.0% | |
2011 | -2.4% | 8.3% | |
2012 | 5.6% | 19.7% | |
2013 | 7.6% | 1.3% | |
2014 | 3.2% | 23.4% | |
2015 | 5.7% | 3.2% | |
2016 | 3.4% | 8.6% | |
Average return | 3.9% | 12.6% | |
# of losing years | 5 out of 23 | 4 out of 23 | |
Average losing year | -2.9% | -18.9% |
The 2006-2011 drop in prices may be > the figures shown above. According to the S&P/Case-Shiller index of 20 major cities, housing prices peaked during 2006. From 2007 through 2011, index home prices dropped 33%, (vs. -13% using FHFA numbers).
During most periods, equity REITs outperformed residential real estate—especially if you factor in costs of ownership: 7% selling commission and closing cost, 1–2% a year in property taxes, and 1–2% a year in repairs and replacements plus some dollar amount for maintenance and property management if the home is rented out. The costs of home ownership are not reflected in the FHFA Index figures above.
The three types of REITs are equity, mortgage, and hybrid. Equity REITs are companies that own and operate income-generating real estate; mortgage REITs invest in mortgages, while hybrid REITs own real estate and mortgages. Over 140 REITs are publicly traded (115 are equity REITs).
From 1976–2016, the return (serial) correlation between equity REITs and the S&P 500 ranged from 20–85%; the correlation between REITs and long-term government bonds has ranged from -22% to 45%. In 2001, Standard & Poor’s added REITs to the S&P 500 Index.
Viewing returns from 2007–2016, it is easy to see adding a well-diversified real estate fund can be beneficial when it comes to risk-adjusted returns. As shown below, there is little consistency between equity REIT, stock, and bond returns.
Annual Return Differences:
U.S. Stocks vs. Med-Term Bonds vs. REITs [2007–2016]
2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | |
Stocks | 6% | -37% | 29% | 15% | 2% | 16% | 32% | 14% | 1% | 12% |
Bonds | 7% | 5% | 5% | 6% | 8% | 4% | -6% | 9% | 2% | 1% |
REITs | -18% | -39% | 28% | 28% | 8% | 20% | 1% | 23% | 3% | 9% |