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Moving Markets

Real Estate ETFs Hit Again by the Rise in Treasury Yields

Real Estate ETFs feel the heat as rising Treasury yields depress the sector, making it April's worst performer.

Rony Abboud
By Rony Abboud · April 15, 2024
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Real Estate Hit by Treasury Yields

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The real estate sector has faced its share of challenges, including the high level of office vacancy rates, but April marked a new low. Real estate is becoming the worst-performing industry of the month while remaining the poorest performer within the S&P 500 this year. This downturn is primarily attributed to rising treasury yields, fueled by worries about sticky inflation. These fears have escalated following the release of inflation data (CPI) that surpassed expectations, dashing any hopes for lower rates in the current quarter. The S&P real estate index declined by 3.06% over the week, bringing its year-to-date performance to -7.20%. Real estate ETFs recorded significant outflows of $502 million this week.

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The Impact of Increased Treasury Yields on the Housing Market

Rising treasury yields have a direct impact on the real estate industry, influencing mortgage and lending rates, which are pivotal to the sector's health. Despite enduring a historic rise in interest rates over the past 24 months, the real estate sector has shown remarkable resilience until now.

The higher-than-expected CPI in March pushed the U.S. 10-year Treasury yield, a critical benchmark for mortgage rates, to 4.52%. This is an increase of 64 basis points since the beginning of the year. With mortgage interest representing a significant cost for homebuyers, higher rates could drastically hinder the ability to sell homes, exacerbating the challenges facing the housing market.

A Stressed Housing Market Leads to Investor Exodus

This mix between rising rates and sluggish housing market dynamics prompted a rapid exit of investors from real estate stocks. The aftermath of the inflation report was brutal on the S&P Real Estate Index (NYSE:XLRE), which saw its worst day since mid-2022, tumbling by 4.10% on April 10th.

The recent sell-off in real estate stocks mirrors a growing consensus among investors regarding the bleak outlook for housing. With no immediate prospects for rate cuts and potential stagnation in housing prices, the sentiment is overwhelmingly cautious. Investors are increasingly wary, suspecting that the housing sector's environment may not see significant improvements soon, making real estate ETFs an area of concern for many. As an illustration, the Vanguard Real Estate ETF (

) lost 2.65% over the week, reaching an annual performance of -6.65%.

Group Data

Index Data

Funds Specific Data: VNQ, SCHH, XLRE, IYR, USRT, RWR, RWO, DFAR

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.

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