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Wednesday, May 25, 2005

Real Estate Bubbles and REIT Spreads (from Seeking Alpha and The ETF Investor)

I've avoided blogging much on whether or not there's a real estate bubble. However, here's an interesting set of charts from the ETF Investor comparing yield spreads between REIT (real estate investment trusts) yields and yields on the 10-year Treasury.

For those of you not in "the guild", a yield spread is the difference between the yields on two investments (with one of them typically being a risk-free investment like a treasury security). Yields move in the opposite direction to prices. So, saying that REIT yields are lower is the same as saying that investors are willing to pay more today for each dollar of income a REIT pays. In other words, if yields are lower, (all else equal) prices of REITs are higher. Remember -- a yield is the inverse of a Price-Earnings ratio, or "P-E".

Since the yield spread (or REITs yields vs, Treasuries) is lower than usual, that means that REIT prices are higher than usual.

However, I'd caution about making this too generalizable, since REITs are typically invested in commercial real estate and/or apartment buildings, not homes. But, to the extent that prices in the different segments of the real estate market move together, it would indicate that the residentail sector could also be over-valued.

Hat tip to David Jackson at Seeking Alpha for the link. I like pictures, and too many of the books I'm currently reading don't have any...

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