Real estate stocks continue to surge as soft inflation reports fuel rate cut hopes

Real estate stocks continued to surge as soft inflation reports bolstered rate cut hopes, with the Real Estate Select Sector SPDR ETF (NYSEARCA:XLRE) outperforming the major market averages for the third straight week.

XLRE increased by 2.51% from last week, closing at 38.76 on Friday. The fund logged gains in three out of the five sessions, with a notable surge observed on May 15, the day the April Consumer Price Index headline inflation came in slightly lower than expected. CPI grew by 0.3% from March, lower than the +0.4% consensus.

The Dow Jones Industrial Average surpassed 40,000 points for the first time ever, and the Dow Jones Equity All REIT Total Return Index rose 2.56% on a weekly basis. FTSE Nareit All Equity REITs closed 2.41% higher.

Comparatively, the S&P 500 index, scaling 5,300 points in a historic first, ended the week 1.54% higher.

According to the CME FedWatch Tool, there is a 27.6% probability of a 25-basis-point interest rate cut to take place at the July FOMC meeting, and a 49.0% chance of the reduction at the September meeting.

Sector Updates

Real estate brokerage Re/Max (RMAX) said the busiest season for home sales got off to a good start in April, with closings rising 11% from March and 9.0% from April 2023, the third straight month-over-month increase.

In addition to the home sales activity, new listings rose 6.3% from March and 18% from a year ago. That boosted the number of homes for sale by 6.3% from March and by almost 29% from April 2023.

The median sale price rose 2.9% to $437K from the prior month, marking the highest price in more than two years and driven by buyers' willingness to pay 100% of the list price vs. 99% in March and last April.

"Gains in home sales, new listings, and the number of homes for sale are all signs of a more active, rebalancing market," said Amy Lessinger, Re/Max president. "This has happened without a significant drop in interest rates – suggesting that buyers and sellers may be less apt to delay their plans this year."

Separately, Housing Starts increased 5.7% M/M in April to 1.360M vs. 1.420M consensus and 1.287M in March (revised from 1.321M). Building permits, meantime, retreated 3.0% from a month ago to 1.440M vs. 1.480M expected and 1.485M prior (revised from 1.467M).

Meanwhile, the NAHB/Wells Fargo Housing Market Index retreated to 45 in May, vs. 51 consensus, from 51 in April, as elevated mortgage rates hindered homebuilder sentiment. That's the index's first decline since November 2023. The index is based on a monthly survey designed to take the pulse of the single-family housing market.

Sentiments

Funds flowed into The Real Estate Select Sector SPDR ETF this week, demonstrating optimism among investors of large real estate stocks.

The fund saw net inflows worth $158.31M this week, compared to outflows worth $1.13M a week ago, according to data solutions provider VettaFi.

SA's Quant Rating system changed its recommendation on the ETF to Hold from Sell this week, with a score of 2.55 on a scale of 5. Notably, the grade on XLRE's Momentum was changed to C from C- with the recent surge in the real estate stocks. SA analysts continue to rate the fund as a Buy.

Meanwhile, sentiment about the short-term outlook for the broader stock market remained mostly unchanged.

Subsector Performance

Specialized REITs were the biggest gainers among S&P 500 real estate subsectors, rising 3.78% from last week. Equinix (EQIX), American Tower (AMT) and Public Storage (PSA) drove the advances.

Industrial REITs were the second in the list, up 3.75% W/W. Prologis (PLD) was among the notable winners of the week.

Fangdd Network Group (DUO), FLJ Group (FLJ) and Wetouch Technology (WETH) were the other significant real estate gainers.

Real Estate Management & Development was an outlier among the S&P 500 real estate subsectors, having declined by 1.01%. CoStar Group (CSGP), expected to complete its acquisition of the spatial data company Matterport (MTTR) in 2024, was a major loser of the week.