Ben Bernanke Destroys REITs
Every act of creation is first an act of destruction.
-- Pablo Picasso
One of the more underreported stories in the past several months has been the knock-on effects of taper talk on REITs (real estate investment trusts). The appeal of these investments relates primarily to the high yield they offer, as money flocks to such stocks when expectations for falling rates rise. They also provide a relatively liquid way of getting exposure to an illiquid asset class. As rates were falling, particularly on the longer duration side, REITs were bid up to valuation levels that were largely illogical. As of June 28, for example, the price-to-earnings ratio of the iShares US Real Estate ETF (NYSEARCA:IYR) was 43.11. Hardly a value play at that point.
More so than that, though, on a relative basis, they have gotten crushed. Take a look below at the price ratio of the iShares US Real Estate ETF relative to the SPDR S&P 500 ETF Trust (NYSERCA:SPY). As a reminder, a rising price ratio means the numerator/IYR is outperforming (up more/down less) the denominator/SPY. A falling ratio means the opposite.
Taper talk began in mid-May, causing a sharp relative decline and subsequent crash, with all outperformance over the last three years erased in a matter of months. Is this justified? Maybe; maybe not. I could easily argue that this was a long time coming given valuations... but by the same token, I maintain my belief that taper fears are way overdone, given persistent deflationary pressure in terms of the lack of demand-pull and cost-push inflation. A rebound can happen for a trade, but the cat is out of the bag. It takes time for such a massive collapse in relative performance to get undone.