Pace Executive MBA - Business Analysis Project on Macro and Statistical Analysis of Real Estate Investment.
We created a Market Report of Macroeconomic Indicators for distribution to Fidelity and their investors in order to keep them apprised of current macroeconomic factors relevant to the Real Estate industry, risks and performance.
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Macro and Statistical Analysis of Real Estate Investment
1. Macro and Statistical Analysis
of Real Estate Investment
Horizon Consulting Inc.
Ahmad Abdel-Aziz
Bill Burkey
Stephanie Diaz
Sadi Hossain
1
2. Executive Summary
• Current Economic Indicators and Recent
Trends
• Monetary Policy Initiatives of the FED and
Effects
• Returns, Risk, and Performance of Real Estate
Industry vs. S&P 500
• Volatility Fluctuation
• Final Recommendations for FRESX
2
3. Economic Indicators
• New Housing Starts
• Federal Funds Rate
• Housing Affordability Index
• GDP Growth
• Mortgage Rates
• Money Supply
• Unemployment
3
4. New Housing Starts
• Utilized for business cycle indication and real
estate market research
• Surveys Homebuilders Nationwide with three
metrics
– New Houses Being Built
– Building Permits
– Housing Completions
• Strengths & Weaknesses
4
6. Federal Funds Rate
• Interest rate at which depository institutions
trade federal funds
• Central interest rate in the U.S. financial
market
• Influences prime rate, mortgages, loans, and
savings
• Currently at 0.25%
6
7. GDP Growth & Mortgage Rates
• GDP growth shows economic improvements
• Increase in general expenditures lead to more
investment in housing
• GDP expanded at an annual rate of 4.10% in the third
quarter of 2013 compared to 2.50% in second
quarter
• An improving economy and low interest rates
boosted buyer demand in most markets, including
real estate
7
8. Housing Affordability Index
• Measures monthly mortgage payments
• Index of 100
– Exact income to qualify for mortgage on a median-
priced home
• Index above 100
– Afford median-priced home, assuming a 20
percent down payment
• Currently at 160
8
10. Inflation Adjusted House Price
Market value of today's median-priced house over a 40-year period
10
11. Change Rate Between Home
Price and Rents
Change in nominal home prices vs. the change in nominal rents since 1983
11
12. Money Supply
• Overall effect on money supply depends on the actions of
central bank and money multiplier
• At times of crisis money multiplier goes down due to banks
hoarding cash reserves
• Increase in money supply - positive effect
– Causes interest rates to drop
– Easier for consumers to get loans
• Increase in money supply - negative effects due to inflation
– Causes the value of the dollar to decrease
– Increase cost of building materials
12
13. Unemployment
• High unemployment rate results in millions
unable to afford to buy houses
• Cause builders to stop building new houses
• Construction workers lose job
• Foreclosures
• Odds of consumers committing to a 15-year or
30-year mortgage becomes low
13
15. Anticipated Changes in Monetary
Policy Affecting Real Estate Industry
Accommodative monetary policy
• Real estate tends to do well when interest
rates are low
– Homeowners and Investors take advantage of low
mortgage rates
• Low level of U.S. real interest rates from 2001-
04 fueled the nation’s real estate bubble in
2006-07
15
16. Anticipated Changes in Monetary
Policy Affecting Real Estate Industry
Restrictive Monetary Policy
• Real estate slumps when interest rates are rising
– Costs more to service mortgage debt
– Leads to a decline in demand among homeowners
and investors
• Fast economic growth constitutes restrictive
or tight monetary policy
– Causes central bank to raising short-term interest
rates
16
17. Anticipated Changes in Monetary
Policy Affecting Real Estate Industry
Monetary Policy Affects Other Countries
• Fall in Latin America currencies have weakened against
the USD due to less accommodative US Monetary Policy
– Brazilian Real lost 16% in the last 3 months in August 2013;
4 year low
– Fall has been contributed to US monetary conditions and
speculation
• The Monetary Policy Committee’s (UK) remit was
restated in March 2013
– Brought slightly more emphasis on economic growth but
no fundamental change to Monetary Policy itself
17
18. Anticipated Changes in Monetary
Policy Affecting Real Estate Industry
Time for a change in Monetary Policy
• Job of Fed: to be loose in times of deflationary threat and
tight in the face of inflationary threat
– Fed’s monetary policy has been neutral; neither causing
inflation or deflation.
• Experts say that we have “Easy Money”
– Half the homes are being bought with cash
– Credit is tight
– Cities are out of cash
– Inflation and interest rate is at historic low
– Deflation and recession plague other nations
– 2% growth for years; lowest in post war history
18
19. Anticipated Changes in Monetary
Policy Affecting Real Estate Industry
Time for a change in Monetary Policy
• Job of the Fed to be loose in times of deflationary threat
and tight in the face of inflationary threat
– Fed’s monetary policy has been neutral; neither causing
inflation or deflation.
• Experts say that we have “Easy Money”
– Half the homes are being bought with cash
– Credit is tight
– Cities are out of cash
– Inflation and interest rate is at historic low
– Deflation and recession plague other nations
– 2% growth for years; lowest in post war history
19
20. Performance Comparison
Real Estate and S&P 500
• Measure of Real Estate Index, S&P 500
• Comparison of correlation, annual
returns, adjusted return per unit of risk
• Select Data from 10yr period for analysis
20
22. Performance of Real Estate to S&P
500
• All three funds, (RWR, FRESX, RIEst) are highly
correlative with the movements of the S&P 500
• FRESX, RWR, RIEst have high variability in returns
YOY indicated by high Annual STD. Dispersion of
past returns is wider than S&P, thus indicating
greater historical volatility
• Returns per unit of risk (Sharpe Ratio), RWR and
FRESX have better returns indicated by higher
Sharpe Ratio
22
23. Is the investment beneficial?
• FRESX annual returns beat RWR ETF, RIEst, and
S&P 500
• Return per unit of risk beat S&P as well
• On average per unit of risk and dispersion of
returns the FRESX, RWR, RIEst portfolios beat
the S&P
• Depends on tolerance for volatility
23
24. CAPM & Multifactor Results
• Test Risk over performance with various
market factors
• Explanations for average returns with three
portfolio factors
• What Model is the best fit for indications of
expected returns for Real Estate:
CAPM or Multifactor?
24
25. FRESX CAPM
CAPM 10yrs Sub Period 1 Sub Period 2
Beta 1.104 0.47 1.39
R2 0.48 0.19 0.62
Alpha 1.33
15.96
25
26. FRESX Multifactor Model
FF 10yrs Sub Period 1 Sub Period 2
Beta 0.93 0.45 1.1
SMB
HML 1.011 0.48 1.01
R2 0.61 0.3 0.7
Alpha 0.84
26
27. RWR CAPM
CAPM 10yrs Sub Period 1 Sub Period 2
Beta 1.09 0.47 1.45
R2 0.49 0.18 0.67
Alpha 1.138
13.656
27
28. RWR Multifactor
FF 10yrs Sub Period 1 Sub Period 2
Rm-RF 0.92 0.48 1.149
SMB
HML 0.97 0.58 0.95
R2 0.61 0.31 0.75
28
29. Which Model?
• The significance of Alpha showed in sub
periods one under both CAPM and FF was non
systemic for both portfolios
• R2 increases in Multifactor Models
• CAPM model indicates more reliable betas
with higher R2
• These portfolios are highly sensitive to market
movements, reliable measures of volatility
29
30. Causes of Volatility
• Economic indicators
• Corporate performance
• Government
• Government economic reports
• Interest rates
30
33. Diversification
• Bonds will offset S&P and RWR
• Real estate is known to serve as a portfolio
diversifier and inflation hedge
• New real estate products and global
opportunities
33
34. Final Recommendations
• The Real Estate Bubble and Financial Crisis
created wide spread volatility and risk aversion
• Key economic indicators, inflation, GDP growth,
low interest rates indicate steady returns
• Long term low volatility translates into steady
annualized returns
• Offers good portfolio balance as long as key
indicators (interest rates, home prices) don’t
fluctuate
34
Editor's Notes
International Interest Rates
StrengthsGood scale for future real estate supply levelsCovers approximately 95% of all residential constructionHas a Positive affect on construction materials being soldWeaknessesNo differentiation between size and quality of homes being initiatedOnly focuses on one area of the economy, real estate BANKING, MANUFACTURING, FINANCIAL SERVICES
Interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnightDetermined by the market but is influenced by the Federal Reserve through open market operations to reach the federal funds rate target. Ex. FOMCThe federal funds rate is the central interest rate in the U.S. financial market. It influences other interest rates such as the prime rate, which is the rate banks charge their customers with higher credit ratings. Additionally, the federal funds rate indirectly influences longer- term interest rates such as mortgages, loans, and savings, all of which are very important to consumer wealth and confidence. (2) Influences rates
EXPANDED AT AN ANNUAL RATE OF 4.1% in third quarter of 2013Increase in general expenditures by consumers and investments by business lead to more investment in housing sector and purchasing of homesReal estate plays a significant role in shaping the economy and the GDP. Additionally, commercial real estate, (which includes multi-family homes, apartment units, offices, retail businesses and manufacturing sites) is part of the equation. Real estate plays a part in the GDP in two ways: through money spent on residential investment and on housing services.GDP, CPI and other key economic reportsHousing is an important source of economic growth. As of the third quarter of 2013, housing’s share of gross domestic product (GDP) was 15.6%, with home building yielding 3.2 percentage points of that totalGDP rose at a 2.8% annual rate in the third quarter, according to the Bureau of Economic Analysis. That marked the fastest growth in a year and was stronger than economists had anticipatedhttp://afrmortgage.com/blog/what-role-does-housing-play-in-the-gdp/#nullhttp://afrmortgage.com/blog/what-role-does-housing-play-in-the-gdp/#nullhttp://www.bankrate.com/rates/economic-indicators/reports.aspxhttp://eyeonhousing.org/2013/11/13/housings-contribution-to-gdp-3q13/Mortgage RatesMortgage Rates since 1971Home prices rose again nationally in September Lender Processing Services (LPS) said today, but in many areas, notably a lot of the older mill towns in the Northeast, prices are still declining, in some cases sharply. LPS's Home Price Index (HPI) was up 0.2 percent from August to $232,000 and has risen 8.2 percent since the beginning of the year and 9.0 percent since September 2012. AnetaMarkowska, Chief US Economist at SocieteGenerale, is optimistic about housing demand despite the recent run-up in mortgage rates. The key to Markowska's view is the concept of "real" interest rates, versus "nominal" interest rates. What's the difference between the two? Inflation. The "real" interest rate is approximately the stated ("nominal") interest rate minus the inflation rate.http://www.freddiemac.com/pmms/pmms30.htmhttp://www.mortgagenewsdaily.com/11252013_lps_hpi.asphttp://finance.yahoo.com/blogs/talking-numbers/why-higher-mortgage-rates-won-t-hurt-housing-113915622.html
Measures the degree to which a typical family can afford the monthly mortgage payments on a typical home. Value of 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home. An index above 100 signifies that family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home, assuming a 20 percent down payment.
15 year fixed 3.63%30 year fixed 4.39%Real estate plays a significant role in shaping the economy and the GDP. Additionally, commercial real estate, (which includes multi-family homes, apartment units, offices, retail businesses and manufacturing sites) is part of the equation. Real estate plays a part in the GDP in two ways: through money spent on residential investment and on housing services.GDP, CPI and other key economic reportsHousing is an important source of economic growth. As of the third quarter of 2013, housing’s share of gross domestic product (GDP) was 15.6%, with home building yielding 3.2 percentage points of that totalGDP rose at a 2.8% annual rate in the third quarter, according to the Bureau of Economic Analysis. That marked the fastest growth in a year and was stronger than economists had anticipatedhttp://afrmortgage.com/blog/what-role-does-housing-play-in-the-gdp/#nullhttp://afrmortgage.com/blog/what-role-does-housing-play-in-the-gdp/#nullhttp://www.bankrate.com/rates/economic-indicators/reports.aspxhttp://eyeonhousing.org/2013/11/13/housings-contribution-to-gdp-3q13/Mortgage RatesMortgage Rates since 1971Home prices rose again nationally in September Lender Processing Services (LPS) said today, but in many areas, notably a lot of the older mill towns in the Northeast, prices are still declining, in some cases sharply. LPS's Home Price Index (HPI) was up 0.2 percent from August to $232,000 and has risen 8.2 percent since the beginning of the year and 9.0 percent since September 2012. AnetaMarkowska, Chief US Economist at SocieteGenerale, is optimistic about housing demand despite the recent run-up in mortgage rates. The key to Markowska's view is the concept of "real" interest rates, versus "nominal" interest rates. What's the difference between the two? Inflation. The "real" interest rate is approximately the stated ("nominal") interest rate minus the inflation rate.http://www.freddiemac.com/pmms/pmms30.htmhttp://www.mortgagenewsdaily.com/11252013_lps_hpi.asphttp://finance.yahoo.com/blogs/talking-numbers/why-higher-mortgage-rates-won-t-hurt-housing-113915622.html
HUGE DIFFERENCE BETWEEN NOMINAL AND INFLATION ADJUSTED HOUSING PRICESReal estate activity peaked in the summer of 2005, but home prices kept rising for another year. In spring of 2006, the real estate prices were still rising even though housing inventories were also rising. Many people denied the existence of a housing bubble at that time. However, around 2009 and 2010 the housing bubble in the U.S. has completely deflated. The charts below aim to inform people about the current state of the real estate market with inflation-adjusted charts and spreadsheets showing today's real estate prices compared to their historical norm. http://www.jparsons.net/housingbubble/
The national money supply is the amount of money available for consumers to spend in the economy. In the United States, the circulation of money is managed by the Federal Reserve Bank. An increase in money supply causes interest rates to drop and makes more money available for customers to borrow from banks.The Federal Reserve increases the money supply by buying government-backed securities, which effectively puts more money into banking institutions. An increase in paper money reduces the value of the U.S. dollar, but increases the money banks can lend to consumers. When banks have more money to loan, they reduce the interest rates consumers pay for loans, which typically increases consumer spending because money is easier to borrow. The government will request an increase in the money supply when the economy begins to slow to spur additional spending by consumers and build confidence in the economy. An increase in money supply can also have negative effects on the economy. It causes the value of the dollar to decrease, making foreign goods more expensive and domestic goods cheaper. With the complex global economy, this can ripple out and affect other nations. Steel, automobiles, and building materials can all cost more. As a result, the prices for home building and real estate increase because of increased material and building expenses. It does make it easier for customers to get loans, however, because banks are more willing to loan money.http://www.wisegeek.com/what-are-the-effects-of-an-increase-in-money-supply.htm
How Does Unemployment Affect the Real Estate Market? It has a huge impact as part of the effect is cyclical. When the unemployment rate is high, millions of people can't afford to buy houses. Since people aren't buying, builders aren't out building new houses. As a result, more and more construction workers are out of a job -- which adds to the unemployment rate. Cycles aside, high unemployment has another major effect -- it drags down the demand. Like you learned in high school economics, the higher the demand is for something, the more you can sell it for. When homeowners see this type of decrease in demand, they become hesitant to put their own houses on the market. There's another thing to worry about when unemployment is high -- foreclosures. The longer people are out of work, the higher the odds are that they won't be able to afford their mortgage payments. There's also a psychological effect to think about. The longer unemployment stays high, the less confident people feel. Even if they have jobs today, they're worried about getting pink slips tomorrow. As a result, the odds of them committing to a 15-year or 30-year mortgage are low. They're not going to take that kind of risk. What's the bottom line? Even if your own employment status is stable, the unemployment problem around you can lead to issues if you're thinking about buying or selling a home.http://www.prnewswire.com/news-releases/how-does-unemployment-affect-the-real-estate-market-185576402.htmlhttp://www.prnewswire.com/news-releases/how-does-unemployment-affect-the-real-estate-market-185576402.html
How Does Unemployment Affect the Real Estate Market? It has a huge impact as part of the effect is cyclical. When the unemployment rate is high, millions of people can't afford to buy houses. Since people aren't buying, builders aren't out building new houses. As a result, more and more construction workers are out of a job -- which adds to the unemployment rate. Cycles aside, high unemployment has another major effect -- it drags down the demand. Like you learned in high school economics, the higher the demand is for something, the more you can sell it for. When homeowners see this type of decrease in demand, they become hesitant to put their own houses on the market. There's another thing to worry about when unemployment is high -- foreclosures. The longer people are out of work, the higher the odds are that they won't be able to afford their mortgage payments. There's also a psychological effect to think about. The longer unemployment stays high, the less confident people feel. Even if they have jobs today, they're worried about getting pink slips tomorrow. As a result, the odds of them committing to a 15-year or 30-year mortgage are low. They're not going to take that kind of risk. What's the bottom line? Even if your own employment status is stable, the unemployment problem around you can lead to issues if you're thinking about buying or selling a home.http://www.prnewswire.com/news-releases/how-does-unemployment-affect-the-real-estate-market-185576402.htmlhttp://www.prnewswire.com/news-releases/how-does-unemployment-affect-the-real-estate-market-185576402.html
Include any anticipated changes in monetary policy and their potential effects on real estate industry. In particular consider any anticipated changes in domestic and international interest rates. Monetary policy refers to the strategies employed by a nation’s central bank with regard to the amount of money circulating in the economy, and what that money is worth. While the ultimate objective of monetary policy is to achieve long-term economic growth, central banks may have different stated goals toward this end. In the U.S., the Federal Reserve’s monetary policy goals are to promote maximum employment, stable prices and moderate long-term interest rates. Impact on InvestmentsMonetary policy can be restrictive (tight), accommodative (loose) or neutral (somewhere in between). When the economy is growing too fast and inflation is moving significantly higher, the central bank may take steps to cool the economy by raising short-term interest rates, which constitutes restrictive or tight monetary policy. Conversely, when the economy is sluggish, the central bank will adopt an accommodative policy by lowering short-term interest rates to stimulate growth and get the economy back on track.The impact of monetary policy on investments is thus direct as well as indirect. The direct impact is through the level and direction of interest rates, while the indirect effect is through expectations about where inflation is headed. Accommodative monetary policy Real estate tends to do well when interest rates are low, since homeowners and investors will take advantage of low mortgage rates to snap up properties. It is widely acknowledged that the low level of U.S. real interest rates from 2001-04 was instrumental in fuelling the nation’s real estate bubble that peaked in 2006-07. Restrictive monetary policy As is to be expected, real estate slumps when interest rates are rising since it costs more to service mortgage debt, leading to a decline in demand among homeowners and investors. The classic example of the sometimes disastrous impact of rising rates on housing is, of course, the bursting of the U.S. housing bubble from 2006 onward. This was largely precipitated by a steep rise in variable mortgage interest rates, tracking the federal funds rate, which rose from 2.25% at the beginning of 2005 to 5.25% by the end of 2006. The Federal Reserve ratcheted up the federal funds rate no less than 12 times over this two-year period, in increments of 25 basis points.http://www.investopedia.com/articles/investing/052813/how-monetary-policy-affects-your-investments.asphttp://www.investopedia.com/articles/investing/052813/how-monetary-policy-affects-your-investments.asphttp://www.investopedia.com/articles/investing/052813/how-monetary-policy-affects-your-investments.asphttp://www.investopedia.com/articles/investing/052813/how-monetary-policy-affects-your-investments.asp
Include any anticipated changes in monetary policy and their potential effects on real estate industry. In particular consider any anticipated changes in domestic and international interest rates. Monetary policy refers to the strategies employed by a nation’s central bank with regard to the amount of money circulating in the economy, and what that money is worth. While the ultimate objective of monetary policy is to achieve long-term economic growth, central banks may have different stated goals toward this end. In the U.S., the Federal Reserve’s monetary policy goals are to promote maximum employment, stable prices and moderate long-term interest rates. Impact on InvestmentsMonetary policy can be restrictive (tight), accommodative (loose) or neutral (somewhere in between). When the economy is growing too fast and inflation is moving significantly higher, the central bank may take steps to cool the economy by raising short-term interest rates, which constitutes restrictive or tight monetary policy. Conversely, when the economy is sluggish, the central bank will adopt an accommodative policy by lowering short-term interest rates to stimulate growth and get the economy back on track.The impact of monetary policy on investments is thus direct as well as indirect. The direct impact is through the level and direction of interest rates, while the indirect effect is through expectations about where inflation is headed. Accommodative monetary policy Real estate tends to do well when interest rates are low, since homeowners and investors will take advantage of low mortgage rates to snap up properties. It is widely acknowledged that the low level of U.S. real interest rates from 2001-04 was instrumental in fuelling the nation’s real estate bubble that peaked in 2006-07. Restrictive monetary policy As is to be expected, real estate slumps when interest rates are rising since it costs more to service mortgage debt, leading to a decline in demand among homeowners and investors. The classic example of the sometimes disastrous impact of rising rates on housing is, of course, the bursting of the U.S. housing bubble from 2006 onward. This was largely precipitated by a steep rise in variable mortgage interest rates, tracking the federal funds rate, which rose from 2.25% at the beginning of 2005 to 5.25% by the end of 2006. The Federal Reserve ratcheted up the federal funds rate no less than 12 times over this two-year period, in increments of 25 basis points.http://www.investopedia.com/articles/investing/052813/how-monetary-policy-affects-your-investments.asphttp://www.investopedia.com/articles/investing/052813/how-monetary-policy-affects-your-investments.asphttp://www.investopedia.com/articles/investing/052813/how-monetary-policy-affects-your-investments.asphttp://www.investopedia.com/articles/investing/052813/how-monetary-policy-affects-your-investments.asp
Include any anticipated changes in monetary policy and their potential effects on real estate industry. In particular consider any anticipated changes in domestic and international interest rates. Monetary policy refers to the strategies employed by a nation’s central bank with regard to the amount of money circulating in the economy, and what that money is worth. While the ultimate objective of monetary policy is to achieve long-term economic growth, central banks may have different stated goals toward this end. In the U.S., the Federal Reserve’s monetary policy goals are to promote maximum employment, stable prices and moderate long-term interest rates. Impact on InvestmentsMonetary policy can be restrictive (tight), accommodative (loose) or neutral (somewhere in between). When the economy is growing too fast and inflation is moving significantly higher, the central bank may take steps to cool the economy by raising short-term interest rates, which constitutes restrictive or tight monetary policy. Conversely, when the economy is sluggish, the central bank will adopt an accommodative policy by lowering short-term interest rates to stimulate growth and get the economy back on track.The impact of monetary policy on investments is thus direct as well as indirect. The direct impact is through the level and direction of interest rates, while the indirect effect is through expectations about where inflation is headed. Accommodative monetary policy Real estate tends to do well when interest rates are low, since homeowners and investors will take advantage of low mortgage rates to snap up properties. It is widely acknowledged that the low level of U.S. real interest rates from 2001-04 was instrumental in fuelling the nation’s real estate bubble that peaked in 2006-07. Restrictive monetary policy As is to be expected, real estate slumps when interest rates are rising since it costs more to service mortgage debt, leading to a decline in demand among homeowners and investors. The classic example of the sometimes disastrous impact of rising rates on housing is, of course, the bursting of the U.S. housing bubble from 2006 onward. This was largely precipitated by a steep rise in variable mortgage interest rates, tracking the federal funds rate, which rose from 2.25% at the beginning of 2005 to 5.25% by the end of 2006. The Federal Reserve ratcheted up the federal funds rate no less than 12 times over this two-year period, in increments of 25 basis points.http://www.investopedia.com/articles/investing/052813/how-monetary-policy-affects-your-investments.asphttp://www.investopedia.com/articles/investing/052813/how-monetary-policy-affects-your-investments.asphttp://www.investopedia.com/articles/investing/052813/how-monetary-policy-affects-your-investments.asphttp://www.investopedia.com/articles/investing/052813/how-monetary-policy-affects-your-investments.asp
Include any anticipated changes in monetary policy and their potential effects on real estate industry. In particular consider any anticipated changes in domestic and international interest rates. Monetary policy refers to the strategies employed by a nation’s central bank with regard to the amount of money circulating in the economy, and what that money is worth. While the ultimate objective of monetary policy is to achieve long-term economic growth, central banks may have different stated goals toward this end. In the U.S., the Federal Reserve’s monetary policy goals are to promote maximum employment, stable prices and moderate long-term interest rates. Impact on InvestmentsMonetary policy can be restrictive (tight), accommodative (loose) or neutral (somewhere in between). When the economy is growing too fast and inflation is moving significantly higher, the central bank may take steps to cool the economy by raising short-term interest rates, which constitutes restrictive or tight monetary policy. Conversely, when the economy is sluggish, the central bank will adopt an accommodative policy by lowering short-term interest rates to stimulate growth and get the economy back on track.The impact of monetary policy on investments is thus direct as well as indirect. The direct impact is through the level and direction of interest rates, while the indirect effect is through expectations about where inflation is headed. Accommodative monetary policy Real estate tends to do well when interest rates are low, since homeowners and investors will take advantage of low mortgage rates to snap up properties. It is widely acknowledged that the low level of U.S. real interest rates from 2001-04 was instrumental in fuelling the nation’s real estate bubble that peaked in 2006-07. Restrictive monetary policy As is to be expected, real estate slumps when interest rates are rising since it costs more to service mortgage debt, leading to a decline in demand among homeowners and investors. The classic example of the sometimes disastrous impact of rising rates on housing is, of course, the bursting of the U.S. housing bubble from 2006 onward. This was largely precipitated by a steep rise in variable mortgage interest rates, tracking the federal funds rate, which rose from 2.25% at the beginning of 2005 to 5.25% by the end of 2006. The Federal Reserve ratcheted up the federal funds rate no less than 12 times over this two-year period, in increments of 25 basis points.http://www.investopedia.com/articles/investing/052813/how-monetary-policy-affects-your-investments.asphttp://www.investopedia.com/articles/investing/052813/how-monetary-policy-affects-your-investments.asphttp://www.investopedia.com/articles/investing/052813/how-monetary-policy-affects-your-investments.asphttp://www.investopedia.com/articles/investing/052813/how-monetary-policy-affects-your-investments.asp
*Eco Indi: Housing starts, GDP, Interest rates, Jobs report, valuation of dollar/currency exchangeVital influence on stock market and can be one of the major factors of market shiftMonetary policy can tighten, loosen or change interest rates to slow growth or increase growth in economy.by tightening policy and raising interest rates we can reduce the amount of money in our financial system (restricting growth). Whereas, by loosening policy and reducing rates, we may be able to spark growth in our markets and increase borrowing.Many investors anxiously await reports from government labor departments that outline job growth and unemployment. The results of these reports often generate either rises or falls in market indexes. If the reports are good, markets tend to rise, and bad reports will often cause a drop.If interest rates rise, as they are now, and surely will when the Federal Reserve slows its bond buying, the hot market often turns cold. Indeed, the slowing in real estate may well have been driven by a taper-driven run up in mortgage rates earlier this year.30 year fixed mtg is average of 4.2-4.4%
V because interest rate manipulation……………….may have an affect on real-estate ind.
When we look at the chart on a yearly bases, you see that the RWR and FRESX are pretyt much on the same move. The SP ,oveis alone with the real estate but at a much smaller scale
Bonds would offset the S&P and RWRThe continual introduction of new real estate products and global opportunities provides for additional diversification possibilities and risk mitigation potential, by providing investors with greater flexibility to customize the real estate portion of their asset allocation.