Time-Varying Real Estate Sensitivities of Mortgage REITs

Abstract

Based on the presumption that mortgage real estate investment trust (REIT) returns are positively co-moved with the variability in real estate activities, He, Myer, and Webb (1996, 1997) used mortgage REIT returns as the proxy for real estate returns when studying the returns of financial stocks. In contrast, Glascock Lu, and So (2000) found that mortgage REIT returns and unsecuritized real estate returns are co-integrated over the 1977-1996 period. The authors interpreted the documented co-integration as a reflection of interest-rate changes underlying both mortgage REITs and unsecuritized real estate Ibis interpretation implies that mortgage REIT investors do not need to worry about real estate market fluctuations, Faced with the seemingly contradictory implications of these two strands of literature, we were motivated in this study to rexamine the real estate sensitivities of mortgage REITs. Our results show that mortgage REIT returns are significantly influenced by real estate price changes in a way that is consistent with possible structural switching points in this industry after 2000. Furthermore, home-financing mortgage REITs appear to be more sensitive to real estate market fluctuations than commercial-financing mortgage REITs.