Real Estate Stocks to Watch Following Rate Cut Expectations

The U.S. stock market began September with a jolt for investors, as August's non-farm payroll data indicated a faster-than-expected cooling of the labor market, heightening economic slowdown worries and dampening risk appetite.

With the rate cut cycle approaching, savvy investors are seeking new opportunities. Beyond previously noted sectors like healthcare, utilities, consumer staples, communication services, and financials, real estate has emerged as a promising beneficiary.

Fed interest rate cuts are expected to lower mortgage rates, boosting the housing market, though not immediately, according to Greg McBride, CFA, of Bankrate. The anticipated rate cut at the Fed's September meeting could stimulate both homebuying and homebuilding by improving access to capital. However, a sharp drop in rates could lead to a surge in demand that outpaces supply, potentially driving up home prices.

The Fed's first rate hike in March 2022 led to declining home sales, with existing-home sales dropping from an average annual rate of 5.33 million in Q2 2022 to 3.88 million in Q4 2023. As rates decreased in early 2023, home sales slightly increased. Over the past two years, existing-home sales are now 32% lower compared to 2022. The Fed's actions also impacted housing inventory, which has struggled to keep up with demand due to underbuilding, rising costs, and a labor shortage. Inventory dropped to 1.6 months in 2022 but has since risen to 4.1 months by June 2023. A Fed rate cut could lower mortgage rates and help the housing market, but it could also push home prices higher if demand exceeds supply, potentially offsetting affordability gains.