Real Estate Sector On The Verge Of A Correction

Corrections are 10% pull backs, Recessions are 20% sell-offs.

So far the real estate sector has seen a decline of about 5%.

Normally I wouldn’t think to much about that, but there are a few things that I don’t like about the chart below:

A perfectly formed rising channel that investors have had confidence in for a good while, has broken in a very big way, with a break away gap to the downside.

There is a breach of a 200-day Moving average

The fall is happening while the rest of the market (minus utilities) is experiencing incredible growth.

But now, residential stocks like Toll Brothers (TOL), DR Horton (DHI), Lennar (LEN) and Pulte Homes (PHM) are all trading at multi-year highs. But they are in the Consumer Cyclical Industry, which is, in fact very strong.

So what is driving this sell-off?

First you have the REITs just getting slammed (Real Estate Investment Trusts, for those who don’t know). Take Simon Property Group (SPG) – they have a $51B market cap and have seen a decline of about 30% since mid-2016. That makes sense though, considering all the closings we are seeing with traditional retail and the ghost towns that malls in general are becoming.

Second there is Public Storage (PSA). The name speaks for itself, and lets just say, it too, has seen brighter days – down about 30%.

But the biggest culprit are the Health Facilities like Ventas (VTR) and Welltower (HCN)

What’s the take away from all of this: Stay away from the real estate plays, unless your are dealing directly with the home builder stocks.