Time-varying real estate sensitivities of mortgage REITs

Abstract

This study examines the linkage between mortgage Real Estate Investment Trust (REIT) returns and the private real estate factor. The results show that real estate sensitivities of mortgage REITs are time varying and have been significant since 2000. Furthermore, home-financing mortgage REITs appear to be more sensitive to real estate market fluctuations than commercial-financing mortgage REITs are. This differential sensitivity is consistent with the notion that the default risk and the prepayment risk associated with residential mortgage loans are more closely related to real estate market conditions than are commercial mortgage loans.

Acknowledgements

The authors thank Ching-Fan Chung at National Tsing Hua University in Taiwan for his helpful comments on an earlier version of this article. Thanks also to the Taiwan National Science Council for its research support with Grant NSC 94-2416-H-224-016.

Notes

¹See Lee et al. (2008) for a review of the real estate exposures of equity REITs.

²Although not reported, excess returns produce similar results. The use of monthly percentage changes in the median sales price index as the real estate factor follows the procedure outlined by He (2002). Although the quarterly series of commercial real estate return proxies computed with the TBI index are not reported, we also repeat our analysis with this series. The quarterly analyses produce similar but smoother patterns of time variation paths of real estate factor coefficients.

³Liang et al. (1995) provide detailed discussions on how the 1976 TRA, the 1979 Fed policy, the 1981 TRA and the 1986 TRA affect the operating environment of the REIT industry.

⁴The insignificant coefficients on the bond market factors for the first sub-period are consistent with Liang et al. (1995). They found that mortgage REITs were not sensitive to interest rate changes during the period January 1973 to February 1976.

⁵The bond market factors may experience possible breaks near 2002. Additional sub-period analyses reveal qualitatively similar results.