Americans seem to ignore rising mortgage rates and are buying homes at the fastest pace in a decade. Sales of existing condos, coops, townhomes and single-family houses have all scaled higher.

Meanwhile, housing starts declined in the month of January while homebuilders’ confidence slipped this month. But a closer look reveals that the housing recovery is on track. This is obvious from the substantial increase in the forward looking indicator, building permits. In such a situation, selecting real estate mutual funds makes for a wise investment option. 

Existing Homes Sales Hit 10-Year High

Existing home sales, which make up the major portion of U.S. home sales, were back with a bang in January, scaling a 10-year high. Buyers brushed aside fears of rising rates in the face of Fed policy tightening, which is likely to speed up this year, as well as higher home prices.

Existing home sales in January were up 3.3% sequentially and 3.8% year over year to a seasonally adjusted annual rate of 5.69 million units, following a downward revision of 5.51 million units in the previous month. Sales surpassed market expectations of 5540 thousand units. Probably, the risk of faster rate hikes drove potential buyers into the market.

This indicator is thought to be a good measure of demand in the real estate sector. Existing home sales is an economic indicator of both the number and prices of existing single family houses, condos and co-op sales over a one-month period.

Building Permits, Homebuilder Confidence High

In January, housing starts declined by 2.6% to a seasonally adjusted annual rate of 1,246,000. However, this reading was higher than the consensus estimate of 1,225,000. Additionally, it represents a 10.5% increase from January’s reading of 1,128,000. More importantly, last December’s figure was upwardly revised from the initial estimate of 1,226,000 to 1,279,000.

Moreover, building permits increased 4.6% to a seasonally adjusted annual rate of 1,285,000, significantly higher than the consensus estimate of 1,217,000. This was the highest witnessed since Nov 2015. This substantial increase for the forward looking indicator implies that the sector is likely to experience better times in the months ahead.

The latest reading of the National Association of Home Builders (NAHB)/Wells Fargo builder sentiment index seems to confirm such a view. Despite the fact that the index declined by 2 points to touch 65 in the month of February, it remains well above the key level of 50. Any level above 50 indicates that builders’ views about sale conditions continue to remain optimistic. In fact, this is the 32nd consecutive month when a level of 50 has been observed.  

Buy These 4 Real Estate Mutual Funds Now

Banking on the aforementioned factors, investing in real estate mutual funds seems to be prudent. Over the years, mutual funds from this category have continued to perform well. They offer a convenient method of investing in real estate because of low initial investment requirements and the advantage of professional management. Investors willing to hold long-term positions would do well to consider these funds as they add stability and bring steady returns to a portfolio.

We have, thus, chosen four mutual funds having exposure to the real estate sector that possess a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy), have positive 3-year and 5-year annualized returns, minimum initial investments within $5000 and low expense ratios.

The question here is why should investors consider mutual funds? Reduced transaction costs and diversification of portfolios without the several commission charges that are associated with stock purchases are the primary reasons why investors should park their money in mutual funds.

Franklin Real Estate Securities A (FREEX - Free Report) invests the majority of its net assets in equity securities of companies operating in the real estate industry, predominantly in the U.S. The fund’s 3-year and 5-year annualized returns are both 10.4%. Its annual expense ratio of 1% lags the category average of 1.26%. FREEX has a Zacks Mutual Fund Rank #2.

Janus Global Real Estate A (JERAX - Free Report) invests a large portion of its net assets in equity and debt securities of real estate-related companies. The fund’s 3-year and 5-year annualized returns are 5% and 8.2%, respectively. Its annual expense ratio of 1.26% is below the category average of 1.37%. JERAX has a Zacks Mutual Fund Rank #2.

PIMCO Real Estate Real Return Strategy A (PETAX - Free Report) invests a major portion of its assets in real estate-linked derivative instruments backed by a portfolio of inflation-indexed securities and other Fixed Income Instruments. The fund’s 3-year and 5-year annualized returns are 13.1% and 10.7%, respectively. Its annual expense ratio of 1.14% lags the category average of 1.26%. PETAX has a Zacks Mutual Fund Rank #1.

Davis Real Estate A (RPFRX - Free Report) invest the majority of its net assets, plus any borrowing for investment purposes, in securities issued by companies principally engaged in the real estate industry. The fund’s 3-year and 5-year annualized returns are 10.3% and 9.6%, respectively. Its annual expense ratio of 0.94% is below the category average of 1.26%. RPFRX has a Zacks Mutual Fund Rank #2.