After a steep stock market dive earlier this year, The Street reveals that real estate is to be included on the S&P 500. Why the big change? What will it mean for other markets?
The S&P Gets a Historic Shake Up
Real estate is finally getting its own place on the S&P 500 index. The move, which is expected to take place in August, is a historic one which says a lot about the current direction of stocks and real estate. Real Estate will create the 11th S&P 500 sector, and come in above telecommunications. Around 25 companies are expected to form this new group. So what does this mean, why is it happening, and what should investors watch out for?
Why is Real Estate Being Thrust into the S&P Spotlight?
Some would argue that the change is simply a product of the S&P updating, and due to real estate outperforming other sector. After the dismal start to the stock market in 2016, others would argue that the S&P 500 is going to need some help later in the year. The same could be said about the REITs making the jump. Financial advisers, fund managers, and trading firms certainly need to feed something new, and to keep earning. To that end, real estate could end up being the savior of the stock market this year.
Real Estate Rocks
Real estate has been performing better than a lot of stocks in recent history. It certainly appears to have a longer upward run in its reserves. Some housing markets still have a ways to go to recover from the early 2000s, yet, most consider stock values far over bloated, and they have been. The addition of real estate will help fund managers keep up their performance track records, retain confidence, and make stock investors a little happier about the fate of their portfolios.
Mass Market Manipulation
We’ve already see massive manipulation of markets over the last decade and a half. We’ve definitely seen hedge funds and private equity giants have a huge impact on the real estate market. Now we see a whole new level of influence happening.
In this move, REITs are going to get a lot more attention. This elevated visibility and position could certainly help them attract investment, and see their valuations pumped up. While REITs may certainly prove to be an important part of the portfolios of many Americans over the next 24 months, there will be increasing internal and external pressure to see these companies perform.
A Trulia housing economist notes that interest rates may have to rise to between 6.5% and the low double digits in order to tip the balance to making it more attractive to rent than buy a home. Clearly higher rates may favor giant REITs who need rents and occupancy rates to stay high.
More Demand for Real Estate in 2016
The increased visibility of real estate, poor performance of other stocks, and need for REITs are all going to drive intense demand for real estate in late 2016 and 2017. That bodes very well for those individual direct investors who are purchasing properties now. It’s great for the net worth of current investors, cash flow of rental property owners, and could be very good for investors who can successfully flip pools of investment properties to bigger players. This could see 2016 sales volume grow far beyond the estimated 5%, and push prices up further.