The Growth of Real Estate
As anyone who was looking to purchase or sell a home in 2021 knows, the US real estate market grew a lot in value in 2021. Will this continue?
By Investment Associate Bobby Adusumilli, CFA.
As anyone who was looking to purchase or sell a home in 2021 knows, the US real estate market grew a lot in value in 2021. For example, the US publicly-traded real estate market, as measured by the Dow Jones US Select REIT Index, returned nearly 46% in 2021, the best year since the index began in 1987.[1]
One driver of REIT performance is property and housing values. Heavily driven by the decline in interest rates resulting from the COVID-19 pandemic, Americans spending more time working remotely, as well as record amounts invested from investment firms, home purchases have been driven by a surge in demand combined with a relatively steady supply.[2][3]
Source: S&P Dow Jones Indices LLC, S&P/Case-Shiller U.S. National Home Price Index [CSUSHPISA], Federal Reserve Bank of St. Louis, 16-Feb-2022, fred.stlouisfed.org.
In the second edition of his famous book Irrational Exuberance that was released in 2006, Nobel Prize-winning economist Robert Shiller wrote, “It is true that for the United States as a whole real home prices were 66% higher in 2004 than in 1890, but all of that increase occurred in two brief periods: the time right after World War II (with the first increases occurring in the early 1940s, just before the war ended) and a period that appears to reflect a lagged response to the 1990s stock market boom (or a response to its boom and crash), with the first signs of increase occurring in 1998. Other than those two periods, real home prices overall have been mostly flat or declining.“[4]
The above data suggests that this past decade - particularly in 2020 and 2021 - are a third such period of a rise in real home prices in the United States.
However, we believe that some of the factors driving this rise are unsustainable. According to the Wall Street Journal as of late 2021, the median time a home stays on the market in the US is around one week, which is a record low.[5] Many purchasers today are no longer taking advantage of low interest rates, often paying all-cash at a price above listing in order to beat out other purchasers.[5] In a sign of exuberance, many homebuyers are not even inspecting these homes as a contractor would recommend.[5]
With short-term interest rates expected to increase significantly throughout 2022, as well as an already growing home supply projected over the next few years, we do not expect this current housing boom to sustain its pace.[6][7] As a result of this and other evidence, we believe that publicly-traded REIT investments will have lower expected returns over the medium-term compared to the last ten years, though we still expect returns to remain positive over the medium- to long-term.
Important Disclosure Information & Sources:
[1] Source: Dimensional Returns Web. The Dow Jones U.S. Select REIT Index tracks the performance of publicly traded REITs and REIT-like securities and is designed to serve as a proxy for direct real estate investment, in part by excluding companies whose performance may be driven by factors other than the value of real estate.
[2] “U.S. Existing-Home Sales Reached a 15-Year High of 6.1 Million Last Year“. Nicole Friedman, 20-Jan-2022, wsj.com.
[3] “Building and Renting Single-Family Homes Is Top-Performing Investment“. Will Parker, 09-Nov-2021, wsj.com.
[4] Irrational Exuberance. Robert Shiller, 2006, Crown Business.
[5] “Homes Now Typically Sell in a Week, Forcing Buyers to Take Risks“. Nicole Friedman, 11-Nov-2021, wsj.com.
[6] “Fed Signals Rate Increase in March, Citing Inflation and Strong Job Market“. Jeanna Smialek, 26-Jan-2022, nytimes.com.
[7] “New Privately-Owned Housing Units Started: Total Units“. Federal Reserve Bank of St. Louis, 31-Dec-2021, fred.stlouisfed.org.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Indices are not available for direct investment. Index performance does not reflect the expenses associated with management of an actual portfolio. Index performance is measured in US dollars. The performance of the indices was obtained from published sources believed to be reliable but which are not warranted as to accuracy or completeness.
Statements contained in this report that are not statements of historical fact are intended to be and are forward looking statements. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.
Advisory services are provided by SJS Investment Services, a registered investment advisor (RIA) with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professionals for specific advice. This material has been prepared for informational purposes only.
Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.
SJS 2021 Capital Markets Expectations: Making Sense Of The Future
SJS uses our 2021 Capital Market Expectations to help design a portfolio that is appropriate for you, and to share insights from the SJS Investment Committee.
To read the full SJS 2021 Capital Markets Expectations, please click here.
SJS works with clients to specify investment goals, and then advises on assets in which to invest, in what percentages, and in which accounts to place these investments. There are many tradeoffs, some of which are known and some that cannot be fully predicted. Using the Four Core Fundamentals of MarketPlus Investing - 1) Markets are efficient and priced fairly; 2) Speculating is futile; 3) Global stocks and bonds have rewarded investors over the long term; 4) Portfolio design matters most - SJS designs low-cost, diversified global portfolios across stock, bond, and alternative asset classes in order to manage the relationship between expected risk and expected return.
One part of this portfolio design process is to project potential expected return and expected risk (volatility) scenarios for each asset class over long term (10+ years) periods. Investing is about forward-looking information. While we learn much from what happened in the past, asset prices are based on expectations of future economic conditions and company fundamentals. These expectations are inherently uncertain, as investors do not know what exactly will happen in the future. Therefore, we believe that providing a range of potential expected returns for each asset class is appropriate, as using a single number may lead to biases or unrealistic & unrealized expectations.
SJS considers numerous factors when designing capital market expectations, including academic research, historical trends, and the current market environment. For example, while the market risk premium (the return of the stock market over the Treasury Bill rate) has been approximately 8% over the last 90 years, muted inflation, slowing growth prospects, and stretched stock market valuations contribute to return expectations being on the lower end of their historical averages.[1] The US Stock Market has far exceeded that market risk premium since 2009 (in large part due to the omission of price declines during the financial crisis while experiencing price gains during the recovery), but international developed and emerging market stocks had a tough decade in comparison, so we would not be surprised to see non-US stocks with greater relative gains in the 2020s. While small value stocks historically captured returns superior to large growth stocks, it was not the case at the end of the last decade. Nevertheless, we remain confident in the statistical evidence and rationale to maintain disciplined exposures to small and value stocks. Finally, with strong bond returns in 2020 and the U.S. Federal Reserve planning to keep interest rates low, bond investors should be prepared for correspondingly low returns.[2]
Every MarketPlus Investing portfolio is globally diversified across and within asset classes, industries, and securities through the use of low cost institutional-class mutual funds and ETFs. Assets are invested where return premiums have historically occurred, and where market indicators imply they will continue. Portfolios are designed for lower turnover by rebalancing based on logical systematic criteria and staying invested regardless of market volatility, which can lead to lower transaction costs. We believe performance lies in the portfolio design itself, rather than stock picking or market timing, and that investors should focus on controlling what they can control. The nominal annualized return on US stocks (as measured by the S&P 500) from 1928 through 2020 was about 10%. But if you had gone to cash and missed the best 76 of the 23,361 trading days (0.33% of trading days), you would have missed all of the return.[3] We do not know ahead of time which days (or months or even years) will have the highest market returns, but through MarketPlus Investing, SJS will continue to support clients by applying these capital markets expectations and using them primarily for long-term strategic planning rather than short-term market decisions.
Source: Morningstar. Asset Classes are represented as follows – US Stock - Russell 3000 TR USD; International Developed Stock - MSCI EAFE GR USD; Emerging Markets Stock - MSCI EM GR USD; Real Estate - S&P Global REIT TR USD; Alternatives - Wilshire Liquid Alternative TR USD; US Aggregate Bond - BBgBarc US Agg Bond TR USD; US Treasury Bond - BBgBarc US Treasury TR USD; US Corporate Bond - BBgBarc US Corp Bond TR USD; Global Aggregate Ex-US Bond - BBgBarc Gbl Agg Ex USD TR USD; Cash / Money Market - USTREAS T-Bill Sec Mkt 3 Mon; Inflation - US BLS CPI All Urban SA.
To read the full SJS 2021 Capital Markets Expectations, please click on the image below.
Important Disclosure Information & Sources:
[1] Source: Dimensional Fund Advisors. Arithmetic average of annual premiums of the Fama/French Total US Market Index minus one-month US T-Bills (1928-2019).
[2] “Fed Signals Low Rates Likely to Last Several Years.” Nick Timiraos, 16-Sep-2020, wsj.com.
[3] Source: Yahoo Finance; S&P Data. See Important Disclosure Information.
There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.
Statements contained in this report that are not statements of historical fact are intended to be and are forward looking statements. Forward looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.
MarketPlus Investing® models consist of institutional quality registered investment companies. Investment values will fluctuate, and shares, when redeemed, may be worth more or less than original cost.
Advisory services are provided by SJS Investment Services, a registered investment advisor with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professionals for specific advice. This material has been prepared for informational purposes only.
Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.
Indices are not available for direct investment. Their performance does not reflect the expenses associated with management of an actual portfolio. Mutual fund investment values will fluctuate, and shares, when redeemed, may be worth more or less than original cost.
All returns represent total return for stated period provided by Morningstar Direct.
Indexes are as follows:
US Stock (Russell 3000 TR USD Index measures the performance of the largest 3000 US companies representing approximately 98% of the investable US equity market. It is market-capitalization weighted.); The S&P 500 Index is a free float-adjusted market-capitalization-weighted index of 500 of the largest publicly traded companies in the United States. Intl Development Stock (MSCI EAFE GR USD Index measures the performance of the large and mid cap segments of developed markets, excluding the US & Canada equity securities. It is free float-adjusted market-capitalization weighted.); The MSCI World ex USA Index captures large and mid-cap representation across 22 of 23 Developed Markets countries, excluding the United States. The index covers approximately 85% of the free float-adjusted market-capitalization in each country. Emerging Markets Stock (MSCI Emerging Markets GR USD Index measures the performance of the large and mid cap segments of emerging market equity securities. It is free float-adjusted market-capitalization weighted.); Alternatives (Wilshire Liquid Alternative TR USD Index measures the collective performance of the five Wilshire Liquid Alternative strategies that make up the Wilshire Liquid Alternative Universe. The Wilshire Liquid Alternative Index is designed to provide a broad measure of the liquid alternative market by combining the performance of the Wilshire Liquid Alternative Equity Hedge Index, Wilshire Liquid Alternative Global Macro Index, Wilshire Liquid Alternative Relative Value Index, Wilshire Liquid Alternative Multi-Strategy Index, and Wilshire Liquid Alternative Event Driven Index. The Wilshire Liquid Alternative Index is double-cap adjusted AUM weighted and rebalanced semi-annually); Real Estate (S&P Global REIT TR USD Index measures the performance of publicly traded REITs and REIT-like securities listed in both developed and emerging markets. The index is designed to serve as a proxy for direct real estate investment, in part by excluding companies whose performance may be driven by factors other than the value of real estate); US Aggregate Bond (Bloomberg Barclays US Aggregate Bond TR USD Index measures the performance of investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS. It rolls up into other Barclays flagship indices, such as the multi-currency Global Aggregate Index and the U.S. Universal Index, which includes high yield and emerging markets debt.); US Treasury Bond (BBgBarc US Treasury TR USD Index measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury. Treasury bills are excluded by the maturity constraint, but are part of a separate Short Treasury Index. STRIPS are excluded from the index because their inclusion would result in double-counting.); US Corporate Bond (BBgBarc US Corporate Bond TR USD Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers.); Global Aggregate Ex-US Bond (Bloomberg Barclays Global Aggregate TR USD Index measures the performance of global investment grade fixed-rate debt markets, including the Pan-European Aggregate, the Asian-Pacific Aggregate, Global Treasury, Eurodollar, Euro-Yen, Canadian, and Investment Grade 144A index-eligible securities.); Cash / Money Market (US Treasury T-Bill Secondary Market 3 Month rates are the daily secondary market quotation on the most recently auctioned Treasury Bills for the 13 week maturity for which Treasury currently issues new Bills. Market quotations are obtained at approximately 3:30 PM each business day by the Federal Reserve Bank of New York. The rate at which a Bill is quoted in the secondary market and is based on the par value, amount of the discount and a 360-day year.) Inflation (US Bureau of Labor Statistics Consumer Price Index All Urban Seasonally Adjusted is a measure of the average monthly change in the price for goods and services paid by urban consumers between any two time periods. It can also represent the buying habits of urban consumers. This particular index includes roughly 88 percent of the total population, accounting for wage earners, clerical workers, technical workers, self-employed, short-term workers, unemployed, retirees, and those not in the labor force.)
Large Growth (Fama/French US Large Growth Research Index) & Small Value (Fama/French US Small Value Research Index): Composition: The index portfolios for July of year t to June t+1 include all NYSE, AMEX, and NASDAQ stocks for which we have market equity for December t-1 and June of t, and (positive) book-to-market equity data for fiscal year ending in t-1. Exclusions: ADRs, Investment Companies, Tracking Stocks, non-US incorporated companies, Closed-end funds, Certificates, Shares of Beneficial Interests, and negative book values. Sources: CRSP databases for returns and market capitalization: 1926 -present Compustat and hand-collected book values: 1926- present CRSP links to Compustat and hand-collected links: 1926- present Breakpoints: “The size breakpoint is the market capitalization of the median NYSE firm, so the big and small categories contain the same number of eligible NYSE firms. The BtM breakpoints split the eligible NYSE firms with positive book equity into three categories: 30% of the eligible NYSE firms with positive BE are in Low (Growth), 40% are in Medium (Neutral), and 30% are in High (Value).” Rebalancing: Annual (at the end of June) 1926-Present Fama/French and multifactor data provided by Fama/French.
Suggested Reading
Making Sense of the Future: SJS 2020 Capital Markets Expectations
SJS uses our Capital Market Expectations to help design a portfolio that is appropriate for you, and to share insights from the SJS Investment Committee.
For the full SJS 2020 Capital Markets Expectations, please click here.
As much as we might wish to, we cannot predict the future. But, one thing we *can* do is reasonably plan for what may happen.
When you work with SJS, one of our first conversations is about helping you determine your overall investment goals. Then, when we create your portfolio, we decide which assets to invest in, in what percentages, and in which accounts to place these investments with those goals in mind. By following our MarketPlus Investing® philosophy, we strive to design low-cost, diversified global portfolios across asset classes using institutional quality mutual funds in order to better manage the relationship between your accepted level of risk and expected return.
As we review the risk and return potential of your portfolio, we’re always looking forward to project potential expected return and risk scenarios for each asset class in which you’ve invested over the long term – meaning 10 years or more.*
While we can learn from what has happened in the past, asset prices are based on expectations of future economic conditions. These expectations are inherently uncertain, as investors do not know what, exactly, will happen in the future. So, we believe that providing a range of potential expected returns for each asset class is appropriate, as using a single number often creates a bias that leads to unrealistic and unrealized expectations.
SJS uses these Capital Market Expectations to help us design a portfolio that is appropriate for you, and to share with you some of the insights from the SJS Investment Committee. We continue to strive for better information and research where appropriate, and we will update these long-term expectations alongside changing market conditions and economic realities.
We can’t know ahead of time which months (or even years) will have the highest market returns, but through MarketPlus Investing, SJS supports you and your investment goals by applying these capital market expectations with caution and using them primarily for long-term strategic planning rather than short-term market decisions.
For the full SJS 2020 Capital Markets Expectations, please click on the image below.
Important Disclosure Information:
Past performance is no guarantee of future results. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.