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Residential REITs: Renters Aren’t Buying

Many U.S. renters are eschewing home purchases despite the means to acquire a new house, bolstering returns for a residential real estate investment trust-related exchange traded fund.

The iShares Residential Real Estate Capped ETF (REZ) includes a 43.9% weight toward residential REITs, along with 54.1% allocation toward specialty REITs, which include companies that provide storage space.

Among the ETF’s top holdings, residential REITs include Equity Residential (EQR) 9.8%, Avalonbay Communities REIT (AVG) 8.0%, Essex Property Trust REIT (ESS) 4.6%, UDR Inc (UDR) 4.2% and Camden Property Trust REIT (CPT) 3.6%.

REZ has increased 22.8% year-to-date and shows a 3.3% 12-month yield.

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According to a recent Federal Reserve Bank of New York survey of renters, respondents believe he or she will have a 63% chance to move over the next three years but only a 44% chance to buy a home when moving.

The “decrease in homeownership is particularly pronounced for younger households, implying that many of them are remaining renters for longer than in the past,” the Federal Reserve Bank said. [Millennials Crimping Homebuilder ETF Recovery]

Current economic fundamentals are given as the main impediment to home ownership. Specifically, a majority of renters believe their weak balance sheets, low income and lack of access to credit.

Others point to inherent advantages of staying as a renter, such as low upkeep and more flexibility.

Additionally, some are reluctant to own a home, with fresh memories of the financial crisis when home prices plunged.

The findings suggest that without a significantly improved economy or easier credit standards, renters are unlikely to change their habits any time soon. Consequently, the slow rebound in the housing market may persist, but residential REITs may continue to prosper under the new dynamics.

iShares Residential Real Estate Capped ETF

REZ_ETF
REZ_ETF

For more information on real estate investment trusts, visit our REITs category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.