Real estate stocks fall after 4 weeks of gain as rate cut hopes dampen

Real estate stocks declined after four consecutive weeks of gain as rate cut hopes suffered a setback.

The Real Estate Select Sector SPDR Fund ETF (NYSEARCA:XLRE) retreated 3.64% from the previous week to finish at 37.35 on Friday.

Dow Jones Equity All REIT Total Return Index declined by 3.53%, while FTSE Nareit All Equity REITs was down 3.20%. Comparatively, the broader S&P 500 posted marginal gains of 0.03% this week.

The ETF logged losses in four out of the five trading sessions and closed flat on the last day. XLRE remarkably fell 2.12% on Thursday, a day after the Federal Reserve minutes read more hawkish than expected.

Fed Chair Jerome Powell said the policymakers were looking for more evidence that the economy was making progress in reaching the central bank's inflation goal. They didn't get that confidence at their most recent meeting.

"Al­though monetary policy was seen as restrictive, many participants commented on their uncertainty about the degree of restrictiveness," the minutes said.

Citi on Wednesday said that Fed officials remain "vague" in their talking points in an indication that they want to keep options available for multiple scenarios.

The odds for rate hikes are better than what would have been thought at this point, Seeking Alpha author Mott Capital Management said.

Paul Krugman, a winner of the Nobel Prize in economics, had said that the trajectory of interest-rate levels in the medium term is completely uncertain.

"I am fanatically confused" on whether borrowing costs will stay above prepandemic levels, Krugman told Bloomberg Television in an interview. "Anyone who claims to know for sure what the answer is to that, is deluding themselves."

Meanwhile, Goldman Sachs now expects the Fed's first interest rate cut of the interest rate cycle in September, instead of July, as previously anticipated.

Sentiments

The Real Estate Select Sector SPDR Fund ETF saw net inflows worth $15.18M this week, compared to inflows of $164.13M in the previous week, data from the information solutions provider, Vettafi, showed.

The down-tick in fund flows into the ETF implies a decrease in optimism among investors of large real estate stocks.

Bearish sentiment among individual investors about the short-term outlook for the stock market rose above historical averages amid rate cut uncertainty, the American Association of Individual Investors, or AAII, Sentiment Survey, said.

Meanwhile, SA's Quant Rating system again changed its recommendation on XLRE this week to Sell from Hold, with a score of 2.13 on a scale of 5. The grade on the fund's Momentum was changed to C- from C on Tuesday and to D+ on Saturday.

SA analysts continue to rate XLRE as Buy.

Residential Space

Home prices climbed 0.5% from the previous month in April and 7.3% from the year-ago period, a report by the real estate brokerage Redfin showed.

Elevated mortgage rates and high home prices have cooled homebuyer demand, but prices continue to tick up because there aren't enough homes for sale, the report said.

New listings have increased in recent months but remain roughly 20% below pre-pandemic levels.

Meanwhile, new home sales declined 4.7% in April to 634K, trailing the 675K expected, from 665K in March, which was revised from 693K. And, existing home sales dipped 1.89% in April to 4.14M, compared with the 4.195M expected and 4.19M in March.

"Although this week's data on previously owned home sales showed a decline, total inventory of both new and existing homes is up. Greater supply coupled with the recent downward trend in rates is an encouraging sign for the housing market," Freddie Mac's chief economist, Sam Khater, said.

The April 2024 Agent Survey indicates a modest uptick in optimism among agents about future market conditions as the spring selling season ramps up.

Subsector Performance

Industrial REITs saw the biggest decrease in value this week. The subsector fell by 6.06% on a weekly basis. The demand continues to moderate in the subsector and vacancies should continue to rise for the remainder of 2024, a report by Baird Equity Research said.

"Looking ahead, a central focus for investors will be whether the longer-term rent growth outlook looks more similar to 2011-2015 or 2015-2019 after vacancy peaks," the report said.

Office REITs were the second-biggest losers, with a decline of 5.13% W/W.

The two subsectors, which saw their occupancies drop in Q1, had driven the fall in the average occupancies of the broader REITs sector during the quarter.

VICI Properties (VICI), Boston Properties (BXP) and Extra Space Storage (EXR) were among the biggest S&P 500 real estate losers of the week.

Here is a look at the subsector performance for the week: