The Housing Market Is Slowing Down But These REIT ETFs Are Running Hot. Thank AI.

Many investors are likely familiar with real estate through their experiences owning a home or paying rent, or maybe even owning a piece of land. Chances are that investors think less about that real estate and its critical, varied role in the stock market. 

So rather than look at “real estate” and real estate investment trusts (REITs) as one big category of investment, let’s take a much closer look at what’s happening across the market now. Because it is far from consistent, and it could lead to opportunities in the fourth quarter. 

First, let’s quickly examine some real estate sub-sectors. 

Let’s start with house prices, which have seen their post-pandemic surge slow down. And, with each passing month, prices in the aggregate are moving from slower growth to negative growth. Not shown here is commercial real estate, which has thus far taken a much bigger slide. Work-from-home trends have reversed a bit, but it doesn’t appear we are going back to our pre-pandemic habits anytime soon.

Next, here’s the picture with mortgage rates. They’ve dropped by nearly 75 basis points over the past three months. That is good for real estate activity, at least in isolation.

However, that development looks different when put in a longer-term context. This shows 30 years of the 30-year fixed mortgage rate. Sure, it has dipped, but from near its highs since late last century. And I wonder if this could end up being too little, too late. 

That is, by the time rates are more motivating for real estate buyers, their pockets and confidence might have diminished. 

With that background in mind, let’s look at REIT ETFs themselves. 

The S&P 500 Real Estate Sector SPDR (XLRE) tracks all real estate stocks within the S&P 500 Index. It used to be representative of what many investors think of when they consider investing in publicly traded real estate stocks: lots of yield, and the stability of being backed by physical assets.

But that has shifted dramatically in recent years. 

First, there was the data center craze, as high-tech firms plunked down a lot of money for cell towers and cloud-based infrastructure. Then, that same secular trend received an even bigger boost from the break-neck pace and urgency prompted by the new artificial intelligence processing power race. 

Here’s the result:

XLRE has 10 stocks that each account for at least 4% of the ETF’s $8 billion portfolio. Collectively they account for nearly 60% of it. And many of them are not what we think of as traditional real estate businesses. For instance, take these 5 from that list above. 

This does not look like a set of similar businesses. Not with those vastly different price-earnings ratios, dividend yields, and price performances year to date. 

There’s a very reasonable explanation for that. Most of them are what we might refer to as “digital” REITs. They are real businesses, of course. But their tenants and clients tend to operate not in homebuilding for people. Rather, for machines. 

This is not the case beyond the top 15 stocks in XLRE. But these data center REITs now occupy many of the most influential positions within a sector ETF that rewards increases in price and size.

These 3 REITs Can’t Agree on Much

That’s why the price chart of the Global X Data Center & Digital Infrastructure ETF (DTCR) has been doing so well the past 6 months. 

While the Vaneck Mortgage REIT Income ETF (MORT) is in the red for 2025. 

Higher-yield REITs are having all kinds of trouble. For example, the KBW Premium Yield Equity REIT Invesco ETF (KBWY) yields 9.8%. But it has given back more than 25% in price during the past 12 months. So investors have suffered a net loss.

Know What You Own and Understand How REITs Are Changing 

Real estate has been a changing asset class since Covid-19 hit. That, plus the surge in activity related to the AI business, has made REIT investing anything but business as usual. Learn to adapt, by analyzing ETF holdings and individual stock business lines. So you know what you own.