Forget the S&P’s new sector, it’s ‘time to move on’ from real estate stocks: Strategist

Real estate will officially become the S&P 500's newest sector after the market closes on Wednesday, but some traders are already shutting the door on real estate stocks.

REITs have outperformed the market this year and still retain their place as one of the top-performing asset classes among all industries. But real estate's heyday could be winding to a close, according to Eddy Elfenbein, editor of the Crossing Wall Street blog.

"Real estate has been a huge winner over the last seven and a half years, the total return is up something like 400 percent," he said Tuesday on CNBC's "Power Lunch." "But now it's facing pretty stretched valuations, and more importantly, it's probably fighting an unfriendly Reserve."

"I thank REITs for the great return, but I think it's time to move on," added Elfenbein.

REITs have been popular among investors, especially in light of record-low bond yields. In their hunt for yield, the same investors turned to REITs for their high dividends, but that could change should the Federal Reserve increase interest rate targets.

Ari Wald, technical analyst at Oppenheimer, also believes that real estate's golden times could be over soon. Looking at a long-term chart of the REIT-tracking ETF VNQ, Wald emphasizes that real estate's high support of $87 still stands, especially as the 200-day moving average continues its rise.

However, Wald also sees interest rates as what will ultimately determine the fate of real estate stocks, and the outlook isn't favorable.

"We think this group is going to be handcuffed by ebbs and flows in interest rates. There's a very tight, negative correlation," Wald said. "So in the near term, if rates back up a little bit, which we think they can, we think [real estate] is going to underperform."


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Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

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