Latest Rate Hike Hits Housing Market and Real Estate Funds

The Fed’s July rate hike has put further pressure on an already strained housing market, with a notable impact on real estate funds over the course of the past week. The US central bank raised its benchmark interest rate by another 25 basis points on July 26, hitting a range of 5.25% - 5.5%, the highest level in 22 years. 

This latest rate increase, which makes borrowing and investing more expensive, exerts additional pressure on the real estate sector. Higher interest rates effectively translate into larger monthly mortgage payments for those holding adjustable-rate home loans. And it’s unlikely that real estate will be alone in experiencing these impacts; other industries are likely to be affected as well. Although the move to normalizing monetary policy should help achieve longer-term financial stability objectives, the short-term effects inevitably exacerbate challenges for a growing number of industries.

The S&P real estate index lost 1.80% over the week bringing its YTD performance to a modest +2.34%, compared with the S&P 500 benchmark index, up 19.34%. Overall, the real estate segment encompassing 47 ETFs dropped by -1.45% for the last week of July but remained in positive territory for the year. Positive flows of more than $242 million were recorded over the same period. 

Illustrating this trend, the Real Estate Select Sector SPDR Fund lost 1.55% over the week. However, iShares Residential Real Estate Capped ETF fared worse (-3.08% week-over-week), indicating that the residential real estate market was more acutely impacted.