US real estate stocks have reached their weakest level ever against the S&P 500, with the ratio now sitting at 0.122. According to reports from Creative Planning, this measure compares the iShares US Real Estate ETF (IYR) to the SPDR S&P 500 ETF (SPY), showing how far broad US equities have pulled ahead of real estate over almost two decades. The decline represents a 73% drop from the peak of 0.46 reached in February 2007, when the housing boom run of outperformance was at its height before the subprime mortgage crisis took hold. As per Creative Planning's Chief Market Strategist Charlie Bilello, the milestone matters because it suggests investors may be seeing a long-term shift rather than a temporary slowdown.
The decline reflects broader market dynamics rather than a crash in home prices, as reported by Creative Planning. Freddie Mac's weekly survey puts the average 30-year fixed rate at 7.28% on October 1, marking the highest level since November 2023. The Federal Reserve has also returned to rate hikes, which hurt REITs by raising debt costs and making dividend payouts less attractive compared to bonds. Higher rates impact REITs twice - through increased borrowing costs and reduced dividend attractiveness relative to fixed-income securities. The 10-year Treasury yield is near its highest level in 25 years, while mortgage rates are nearing 8%, reversing the low-rate support that helped the housing market for years.
Peter Schiff, chief economist at Euro Pacific Asset Management, believes the sector has much further to fall, as reported by Creative Planning. Schiff argues that real estate thrived on steadily falling mortgage rates and government support, both of which are now reversing. He called the industry 'dead' and expects the sector to sink further, stating "Plus they are going a lot lower from here. The industry is dead. It lived by ever falling mortgage rates and government subsidies. It's now dying by reversal of the same dynamics." Schiff's comments highlight a major change in interest rates and Federal Reserve policy, after the 2008 financial crisis, low borrowing costs helped boost REIT values, real estate deals and homebuilder profits, while now higher 10-year Treasury yields have raised borrowing costs and made REIT dividends less attractive to investors.
According to Creative Planning, households are making a similar shift, with stocks now accounting for a record share of US household wealth while the home equity share has slipped. The ultimate driver of real estate stock performance may be the 10-year Treasury yield sitting above 5%, which allows investors to earn solid income without property risk. Investors are also moving money into safer Treasuries and technology stocks, cutting demand for real estate. This trade-off could continue to weigh on US real estate stocks until interest rates turn lower, as reported by Creative Planning.
