11-12-03                                                                                           Vol. 6: No. 11 RealtyStocks' Observer If you're not receiving this free monthly e-newsletter, please register. Monthly Feature: A REBOUNDING ECONOMY & THE IMPACT REAL ESTATE A. Job Growth Bolsters Other Favorable Economic Indicators B. Growth, Rising Rates and the Affect Upon Real Estate C. Equity REIT Performance D. Mortgage REIT Performance E. Large Cap REIT Performance F. Realty Corporations G. Real Estate Mutual Funds A. JOB GROWTH BOLSTERS OTHER FAVORABLE ECONOMIC INDICATORS The economy has been making better gains than expected. The GDP was up a whopping 7.2% for the third quarter, one of its strongest performances in years and a couple percent higher than the general consensus just a few months ago. Consumer confidence gained, housing starts increased, productivity was positive, manufacturing was up and corporate spending was finally robust and in the double digits until recently. What has been lacking was strong job growth. Last month we observed the likelihood of a turnaround in job growth. Not only was October a bullish month for employment with a gain of 126,000 jobs, in addition to a revised gain of 138,000 in September, but it produced the third straight monthly increase in job growth. Further, unemployment dropped to 6% and unemployment claims dropped by 43,000 to 348,000, the lowest level during President Bush's administration. However, comments by Federal Reserve Chairman Alan Greenspan and recent remarks from President Bush about the economy were recently tempered. In particular, Greenspan's recent remarks indicated that a 3-month gain in jobs does not make for a complete recovery. More specifically, he is concerned about the strain the growing national debt and a soon to retire baby boomer generation, will place upon Medicare and our national deficit. Furthermore, the spending from this important aging segment may also begin to decline. Although this will not have an immediate impact upon the next few years, Greenspan worries that a bloated deficit could cause higher interest rates for a decade or more. As an early indication of this deficit issue, treasury borrowing will set an all time high of $117 billion in the fourth quarter and expected to rise to $160 billion the first quarter next year. Despite the increase in jobs, Bush acknowledged in a speech last week that some parts of the country are not only lagging in new jobs, but involve some industries where manufacturing jobs will not return, (e.g. textiles, furniture making, autos, etc). This will not only require new jobs in other industries, but the re-training of a significant part of our work force. This is supported by a closer look at recent job creation which indicates a continuing fall off in high paying manufacturing jobs and an increase in mostly lower paying service jobs. Because of this and gains in productivity, the average hourly wage is relatively flat. Yet, with rates so low, it is also causing consumer borrowing to jump. Though consumer spending, which constitutes about 70% of the GDP, is relatively strong, it has not been due to an increase in earnings. Therefore, with potentially higher interest rates that could reduce an important aspect of consumer spending soon, there is concern that the main part of our economic engine could develop some hic cups.   Top B. GROWTH, RISING RATES AND THE AFFECT UPON REAL ESTATE It certainly seems as though we are transitioning from an uncertain economy to one that is growing. However, despite a monthly increase of 150,000 jobs, some experts believe that this level of increase is required for our future growth to just stay even because of our population increase, as well as workers who are off of unemployment compensation but are still jobless. Recently inacted tax benefits are dissipating, so that the economy may not be quite as strong in the fourth quarter as this past quarter. However, should we have a mild early winter, robust retail holiday sales, and if fossil fuel costs remain steady, a better than expected GDP may occur this coming quarter. In addition, if the extension period for unemployment benefits is not renewed by year-end, this indicator suddenly looks more favorable beginning next year. Despite increased treasury borrowings and a strong economy, most economists feel that the Feds are unlikely to raise rates until possibly March of next year. Even then, the National Association of Realtors (NAR) is forecasting that fixed 30-year interest rates should only increase from slightly under 6% presently, to about 6.5% a year from now. However, a recent survey of economists peg the Fed lending rate to grow to over 1.75% in the next year from 1% today. Depending upon spreads, this could indicate a home loan rate that could be higher than NAR forecasts, or closer to around 7%. Though interest rate forecasts will vary, so long as the economy is growing, there is almost unanimous consensus that interest rates will rise and the faster the growth, the higher the rates. The main concern we have had since the beginning of the year, is that if rates rise abruptly, it will negatively impact all types of real estate from a both valuation and construction perspective, even though occupancies and rents may actually increase. However, depending upon the type of job growth, it will affect some types of real estate more than others. For instance, based on what was previously stated, this is not a good time to own manufacturing buildings in areas that are used for textiles and furniture making. However, due to an increase in financial, health services, and retail jobs, this could be a more favorable time for office and retail properties. Though a spike in interest rates would be bad for real estate valuations across the board, it may be somewhat favorable for apartments as many people will be cut off from home ownership and forced to rent. As a result, performances of REITs in the coming year are also likely to be influenced by the types of properties they own.   Top C. EQUITY REIT PERFORMANCE Equity REITs posted another respectable gain of 2.14% for October. Except for Apartments & Mobile Home Parks, with slight price losses of -0.69% and -0.55%, all other property type groups were positive for the month. The best monthly performers were Factory Outlet Centers and HealthCare, up 6.3% and 4.69%, respectively. Year-To-Date (YTD), Equity REITs have risen 23.79%. All groups except Diversified, up just 10.15%, have appreciated over 13% for the year. Factory Outlets and Health Care are leading the charge with respective increases of 38.98% and 32.92%. The best performing Equity REITs for October were National Health Investors, Inc. (NHI) and Jameson Inns, Inc. (JAMS), gaining 16.6% and 15.9%, respectively. The worst monthly performers were Presidential Realty Corp. (PDLA) and Century Realty Trust (CRLTS), losing -11.4% and -10%, respectively. The best performing stocks YTD were Golf Trust of America (GTA) and Omega Healthcare Investors Inc. (OHI), gaining 120.7% and 100.5%. The worst performing stock YTD were Phillips Int'l Realty (PHIR.ob), losing -34.4%, and Transcontinental Realty Investors (TCI), losing -25.7%, respectively. (Please see Equity Gainers and Losers.).   Top D. MORTGAGE REIT PERFORMANCE Mortgage REITs posted a stellar monthly gain of 5.77%. The mortgage sector broadened its lead over Equity REITs with a price gain of 34.7% YTD. Residential Mortgage stocks are still benefiting from refinancings and low mortgage rates and have been the best performing group with an increase of 11.10%. The best performers for October were Novastar Financial, Inc. (NFI) and INMC Mortgage Holdings (NDE), up 28.3% and 26.9%, respectively. The worst performer was Imperial Mortgage Holdings, Inc. (IMH) losing -7%, respectively. The best performers YTD were Novastar Financial, Inc. (NFI) and American Residential Inv. Trust (INV), gaining 137.7% and 117.3%. (Please see Mortgage Gainers and Losers.)   Top E. LARGE CAP REIT PERFORMANCE With an increase of 1.7% for October, Large Cap REITs trailed the broader monthly REIT performance. For the year, this group has gained 20.5%, which is a few percentages behind Equity REITs and several percentages behind the performance for all REITs. The best large cap performer for October was Trizec Properties, Inc (TRZ) followed closely by General Growth Properties (GGP) gaining 8.9% and 6.7%, respectively. The worst performing large cap REIT for the month was Host Marriott Corporation (HMT), falling -2.6%. The best performing stock, YTD, was General Growth Properties (GGP), gaining 47.1%, and the worst YTD and the only to be in the negative range was Crescent Real Estate Equities (CEI), losing -7.8%. Please see Large Cap REITs.)   Top F. REALTY CORPORATIONS Realty and Housing Corporations gained 6.41% in October, with all but one group in positive territory. The best monthly industry performers were Mobile Home Manufacturers and Home Builders, gaining 15.9% and 15.3%, respectively. The worst monthly performer of these groups, was Developers with a loss of -0.51%. The best stock performers for October were Liberty Homes, Inc. (LIBHA), up 44.2% and Drew Industries, Inc. (DW), up 35.3%. The worst monthly performers were Lipid Sciences, Inc (LIPD) and EMCOR Group, Inc (EME), down -21% and -11.4%, respectively. The best performers YTD were Tut Systems Inc. (TUTS) and Crown Castle Int'l Corp (AMT), gaining 332.5% and 237.6%. The worst performers YTD were US Realtel, Inc. (USRTE.OB), down -74.5%, and EMCOR Group Inc. (EME), down -28.9%, respectively. Realty Corps. are now up 47.86% on the year. (Please see Realty Corp. Gainers and Losers.)   Top G. REAL ESTATE MUTUAL FUNDS (REMFs) The average total return for real estate funds in October was lower than the broader REIT performance with a loss of -0.56%. The best performing monthly REMFs were CGM Realty & Alpine with respective overall returns of 9.37% to 3.16%. The best performers YTD were CGM Realty and Alpine, both with stellar returns of 81.43% and 46.49%, respectively. (Please see REMFs.)   Top Stock Changes. No stocks changes for October. Note: In reporting group percentage changes, stocks that were under $1 are excluded from our calculations. If a stock is under $1 for more than two months, it is subject to removal from our coverage. All gains or losses regarding Realty Stocks are price changes only; dividends are excluded, and are calculated as of the end of each month. Disclaimer: The material provided herein should not be taken as endorsements or recommendations to invest in a stock, fund, a group of stocks or other securities. No guarantee can be made as to the expected performance of such investments. Investors should consult all available information, including data external to RealtyStocks and associated Web sites, and exercise own best judgment before making any investment decisions. The author may have equity positions in some of the companies covered in RealtyStocks, which may change from time to time, and will divulge such information upon request   Top InRealty Sponsors Inquire about our special advertising banner promotions! E-MAIL: stocks@inrealty.com Copyright ©2003, WebVisers Inc. All rights reserved .