The unique view of the real estate sector for 2024 - and what is to come
Despite a rough few days for the S&P 500, which is still comfortably in the green for the year (up 6%), one sector of the stock market is feeling more pain than the rest.
The notion that interest rates could stay higher for a long time is hurting the real estate sector, even as debate rages over how often—if at all—the Federal Reserve will cut interest rates this year.
The group is by far the worst performer in the S&P 500 for 2024, down more than 10%. Most of these declines came in the last two weeks, when the yields of the Ministry of Finance climbed to their highest level since November and investors are going through the stage of acceptance that the expected cuts are not on the way.
Now investors are faced with the question of whether to buy the decline or, to quote another market cliché, risk trying to catch a falling knife.
One real estate investor said that the rent indicators she sees in real time are encouraging on the inflation front. This is in contrast to the much-hyped rent barometers that the Fed relies on.
"If you take into account real-time shelter costs, it's much lower than what actually appears," Uma Moriarity, senior investment strategist at CenterSquare, told Yahoo Finance. "We think inflation is in the right direction."
This is why it is still confident of three rate cuts this year - a view, of course, that the market has moved away from. This is also why she is still confident in real estate. This, in addition to the fact that the shares are relatively cheap.
The reasons that real estate stocks suffer when rates rise are twofold. First, companies tend to carry a lot of debt, and as rates rise, it becomes more difficult to service or refinance that debt. Second, with relatively high dividend yields, stocks compete with tools like money market funds for investing dollars.
Traditionally, it has been difficult for real estate stocks to rise in the face of rising rates. But if Moriarty – and Citigroup – are right, they may not rise as long as the broader market is watching.
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