Both IYR and VNQ are facing resistance at the $63 level, which was coincidentally the highest point for both ETFs last July. While the funds have had impressive bounces off their October lows, they haven’t been able to get over the hump and are now overbought based on their weekly slow stochastic readings and the 10-week Relative Strength Index (RSI) readings. They look poised for a drop of around 10% with the 104-week (two-year) moving average acting as the support.
The holdings of these two ETFs are very similar (but not exactly the same), thus the reason for the similar price performance. Both of these funds are more heavily invested in commercial real estate stocks than residential, but there is a mix of the two.
Both VNQ and IYR have tripled since their March 2009 lows, but they have done it with little improvement in the real estate market. At the peak of the real estate bubble in 2006, housing starts were above the two million mark. Today housing starts are running at a pace of around 700,000 per year. Likewise, new home sales peaked in 2006 and were running at a pace of 1.4 million homes sold per year. Today the pace is around 325,000.
If we look at a chart of real estate prices, we can see that the real estate market has yet to climb back above 2008 levels. The Moody’s/Real National- All Property Type Aggregate index has been moving sideways between 110 and 120 for the last three years. The peak in real estate prices came in 2007 when the index hit 190.
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So while real estate prices have been range bound, the real estate ETFs have tripled in the last three years. In other words, the performance of the IYR and VNQ has gotten ahead of what the actual real estate market is doing. I don’t think the funds will enter into a freefall like the one we saw in 2008, but rather a 10-12% correction that lasts three or four months.
If you are looking for a way to take advantage of any pullback in the IYR or VNQ, you don’t have to worry about shorting the funds. There are two active inverse funds that focus on real estate. The ProShares UltraShort Real Estate fund (NYSE:SRS) is a double-leveraged inverse fund and will climb approximately 2% for every 1% decline in the IYR or VNQ. The second inverse fund is a triple-leveraged inverse fund. The Direxion Daily Real Estate Bear 3X Shares (NYSE:DRV) fund will move up approximately 3% for every 1% drop by the IYR or VNQ.
If IYR and VNQ do experience a 10-12% pullback, SRS will move up approximately 20-24% and DRV will move up 30-36%. These leveraged ETFs don’t always have an exact move in line with the regular funds’ decline, but over short periods of time, the relationship tends to hold true. After about six months, the relationship starts breaking down a little.
As of this writing, Rick Pendergraft does not own any ETFs mentioned here.