The US housing market is on fire these days. House prices rose the most in more than 30 years in April, according to data released Tuesday. That came after a 13.2% increase in March. April was also the eleventh month in a row that price increases accelerated.
After these dazzling increases, there are good reasons to believe that the country's housing market will remain strong for many years to come. Low interest rates and the pandemic-driven shift to suburban living are contributing to the housing shortage, pushing prices up.
"The forces that have propelled home price growth to new heights over the past year remain in place and offer little evidence of a decline," said Matthew Speakman, an economist at Zillow Group.
"The number of available homes for sale remains historically small, especially given the increased demand for housing."
To take advantage of this robust activity in the real estate market, investors are moving their funds to companies best positioned to thrive in this environment. For example, the index is up 22% this year, double the increase in the .
IYR Weekly Chart.
Exchange traded real estate funds also attract money from investors. The iShares U.S. Real Estate ETF (NYSE:) posted $1.3 billion in inflows in the first week of June.
VNQ Weekly Chart.
The $75 billion Vanguard Real Estate Index Fund ETF stock (NYSE:) posted $1.2 billion in inflows in May, according to Bloomberg data. Real estate stocks worth taking is the fear of inflation in the post-pandemic world. As the economy reopens and people resume their normal lives, there is a possibility that inflationary pressures will escalate.
If that happens, it could hurt corporate earnings and force the Federal Reserve to raise interest rates faster than expected. In that environment, investors could get higher returns from real estate investment trusts (REITs), companies that manage large apartment buildings, commercial real estate or shopping centers.
Consumer prices rose 5% in May from a year earlier, according to the US Department of Labor, the largest increase in inflation in nearly 13 years. Federal Reserve officials last month said they expect to raise interest rates by the end of 2023 as inflation picks up.
Simon Property Group Weekly Chart.
Shares of Simon Property Group (NYSE:), America's largest shopping center operator, whose share is up more than 50% this year, returns more than 4%.
Brookfield Property Partners weekly chart.
Similarly, Brookfield Property Partners (NASDAQ:), which manages offices, retail, multi-family and industrial assets worldwide, offers an annual return of approximately 7%. The yield on US Treasuries is just under 1.5% at the time of writing.
Starting point
In a low interest rate environment, where housing demand remains strong, real estate stocks will continue to benefit. Investors could buy some of the top quality REITs that offer decent returns and a potential for capital gains to capitalize on this trend.
