Investors Remain Bullish on Real Estate as the Stock Market Sinks

As the equity markets around the world show little signs of gaining momentum or heading lower, investors are left wondering how much of their portfolio they should dedicate to stocks. In fact, Goldman Sachs recently announced to their clients that the outlook on the stock market is neutral over the next year. That announcement came shortly before the anniversary of the S&P 500’s all-time peak, which occurred on May 21, 2015. For yield-starved investors in the prolonged low-interest-rate era, a sputtering stock market eliminates another investment vehicle.

Should investors heed Goldman Sachs advice? Will the “Sell in May and Stay Away” strategy work for a second consecutive year? Many of the global headwinds facing investors persist. Greece remains on the edge of default as Germany and the International Monetary Fund (IMF) tussle over debt relief. China’s soft landing appears more likely than just a few months ago, though the world’s second largest economy is undoubtedly slowing. Japan joined a litany of other central banks implementing negative interest rates with little impact; and weakness in emerging markets, particularly Brazil, is deepening on the back of a strong U.S. dollar.

The global economy’s newest unknown is the potential impact of the “Brexit,” or Britain’s self-imposed exile from the European Union. Voters will decide if the United Kingdom will begin to redefine its ties with the EU at the end of the second quarter. Despite the minefield of potential hazards, the U.S. economy has pressed forward at a steady, slow pace over the past year. Consumer sentiment approached post recession highs in the initial May reading, and auto sales set an annual record during 2015. So far in 2016, auto sales are on pace to set a new all-time high, buoyed by low interest rates and more-relaxed lending standards.

The freshness of Goldman Sachs’ announcement aside, the U.S. equity markets have been in neutral territory for more than a year already. Other promising investment vehicles, including commodities and growth markets, have also faltered in recent quarters, leaving investors with few bull markets in which to deploy capital.

NSA National Price

Some areas of investment real estate, including single-family rentals, continue to show bullish signs. The median price of a single-family investment property soared 12 percent from April of 2015 through the same period this year. Average cap rates, or the ratio of net operating income to sales price, averaged 5.3 percent at the beginning of the spring buying season. Cap rates offer investors a snapshot into expected first-year returns for an investment property when transaction costs are not considered. With few places to turn, investors are increasingly attracted to yields north of 5 percent. Most buyers willing to explore beyond their geographical boundaries can find even higher returns in single-family investments.

NSA National CapRate

Sources: HomeUnion Research Services, Bureau of Economic Analysis, Freddie Mac, Standard & Poor’s, U.S. Securities and Exchange Commission

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