Buzzbuzzhome Corp.
March 31, 2010

Housing prices are falling in the US, and there’s been more than a quiet murmur of a commercial real estate bust, but Real Estate Investment Trusts (REITs) are doing great!

The iShares Dow Jones Real Estate exchange-traded fund, which owns about 75 real estate stocks, is up 9% so far in 2010…And REITs across the board are having a good year. CNN Money

So I think it’s obvious there’s a discrepancy between the underlying asset, the building themselves, and the securities being traded. The big question, then, is why?

The answer is fairly simple: yield.

REITs tend to pay out dividend income rather than capital gains. So on that 90% of the income that they distribute is exempted from federal income tax.

Investors that are traditionally in the fixed-income securities market are switching to REITs realizing that there is more yield to be had. For example, the iShares REIT ETF is currently receiving a yield of 4.5% which can be compared with the 10-year US T-Bill rate at 3.9%.

But that’s not the only reason. After all, utilities companies generally pay dividends as well and their stocks haven’t increased to the same degree as real estate. So it’s also just a general sentiment that the market will improve later this year and in 2011. Hooray for optimism!

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