Weak Housing Data a Blip? 3 Real Estate Funds to Buy Now

The housing sector seems to have hit a roadblock of late. Latest data including lower sales and stumpy prices are in contradiction to the steady recovery the sector has been enjoying. Following the winter chill, the housing market had been undergoing a steady recovery. The latest round of housing starts, pending home sales, new home sales and Case Shiller home prices were all indicative of the recent lull the sector is exposed to. Pending home sales declined in June after three consecutive months of solid growth.

However, the recent sign of a slowdown may well turn out to be a temporary weakness, as the low prices along with low rates may keep Americans interested in affording a home in the long run. We will help investors indentify top-ranked Real Estate funds that are most likely poised for gains going forward.

Pending, New Home Sales Drop

Data released by the National Association of Realtors revealed pending home sales dropped 1.1% to 102.7 in June from May’s revised figure of 103.8. The drop in pending home sales in June was in contrast to the consensus estimate of a rise of 0.3%.

The report followed discouraging new home sales numbers. New single-family houses decreased 8.1% to 406,000 in June. New home sales registered its biggest drop in almost a year.

The US Census Bureau of the Department of Commerce reported a 1.8% drop in construction spending to $950.2 billion in June from May’s revised estimate of $967.8 billion. This decrease in the payout by builders on residential and nonresidential structures was in sharp contrast to consensus estimate of an increase by 0.8%.

Additionally, data showed home price growth is slowing. S&P/Case-Shiller Home Price Indices data revealed that the 20-City composite index, the leading measure of U.S. home prices, rose 9.3% year on year in May. However, the rate of growth was down from April’s year-on-year rise of 10.8%.

The Positive

In contrast, existing home sales increased 2.6% in June. This metric increased to a seasonally adjusted annual rate of 5.04 million in June from May’s upwardly-revised figure of 4.91 million. This was also more than the consensus estimate of 4.98 million. Existing home sales rose for the third consecutive month in June, touching the highest level since Oct 2013.

The latest data also comes just about a month after upbeat data. The previous edition was encouraging for the sector. In June, the U.S. Census Bureau and the Department of Housing and Urban Development reported upbeat data on new single-family home sales. Sales of new single-family houses increased 18.6% from April’s revised rate of 425,000 to a seasonally adjusted annual rate of 504,000 in May. New home sales for the month of May increased to the highest level in six years.

A Choppy Recovery

Taken together, data reveals that a recovery is indeed underway, albeit a choppy one. Home price growth may have declined to single digits in May, but this fall comes after a series of increases. Meanwhile, wage growth remains stagnant even though the job market has turned the corner.

3 Housing Funds to Buy Now

We will pick 3 real estate funds that carry a Zacks Mutual Fund Rank #1 (Strong Buy) as we expect the funds to outperform its peers in the future.

Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but the likely future success of the fund.

These funds also have high returns year to date and over the last one year. The funds have relatively low expense ratio and carry no sales load.

PIMCO Real Estate Real Return Strategy P (PETPX) seeks high real return by investing in real estate-related derivative instruments. These instruments are backed by inflation-indexed securities and other fixed income instruments. The fund may invest a maximum of 30% of its assets in foreign currency denominated securities.

The fund has returned 27.3% year to date and 17.6% in the last one year. The fund carries no sales load and has an expense ratio of 0.84% as compared to category average of 1.32%.

DFA Real Estate Securities I (DFREX) invests in marketable equity securities of firms that are engaged in ownership, management, construction, or sale of residential, commercial and industrial real estate. The fund consists of shares of equity and Real Estate Investment Trusts.

The fund has returned 17.4% year to date and 12.9% in the last one year. The fund carries no sales load and has an expense ratio of 0.18% as compared to category average of 1.32%.

JHFunds2 Real Estate Securities 1 (JIREX) seeks to provide long term growth of capital as well as current income. The fund invests a large proportion of its assets in equity securities issued by real estate investment trusts and companies. Not more than 10% of its assets may be invested in foreign firms.

The fund has returned 17.6% year to date and 12.8% in the last one year. The fund carries no sales load and has an expense ratio of 0.79% as compared to category average of 1.32%.

To view the Zacks Rank and past performance of all real estate mutual funds, investors can click here to see the complete list of funds.

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