6 Real Estate Stocks That Deserve A Home In Your Portfolio

The U.S. Federal Reserve is on a chopping spree this autumn, cutting its benchmark Federal Funds rate by 0.50% in September and lopping off another 0.25% in early November. The moves brought the Fed Funds rate down to a target range of 4.50% to 4.75%.

The Fed's Open Markets Committee meets again on December 17th and 18th, and the buzz around Wall Street is that the committee will opt to slash rates again despite a higher-than-expected consumer price index (a key barometer of U.S. inflation) of 2.6% for October 2024.

Early November trading data indicates the Fed will cut rates in the December meeting but likely "skip" another round of cuts in January, according to the benchmark CME FedWatch tool. As of November 14, the CME tool sees a 59% chance of a rate cut at the December meeting, with 41% expecting rates to remain stable.

While most economic sectors are watching the Fed closely, the real estate industry is particularly focused on what the Fed might do next. After all, the industry operates on an interest rate-driven home purchase model that usually benefits when interest rates are downsizing.

"The recent rate reductions have begun to lower borrowing costs, albeit gradually," says Tim Choate, the founder, and CEO of RedAwning.com, Inc. in Berkeley, Cal., a vacation rental services company. "This easing makes mortgages and financing for property investments more accessible, potentially revitalizing sectors that were cooling off."

In the vacation rental industry, property owners are seizing the moment to refinance or invest in upgrades, "enhancing the guest experience and staying competitive," Choate notes.

They're not alone. Conventional home buyers also show signs of vibrancy after several years of sky-high mortgage rates.

"The market response has been pretty telling," says Jenna Lofton, a certified financial planner in New York, N.Y.  "One of my clients just locked in a mortgage rate that would’ve been unthinkable six months ago, and I’m hearing similar stories from other advisors."

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Time to Buy Real Estate Stocks?

Nobody's saying the real estate market is out of the woods yet.

Still, the mood seems to be moderately upbeat among buyers and industry professionals, and that's potentially good news for real estate stocks, especially in the homebuilding and lending trades.

"From a stock perspective, the Fed rate reductions favor real estate companies, particularly those in the home lending and homebuilding sectors, as lower rates translate into increased housing demand and potentially more favorable terms for refinancing," says Shirley Mueller, founder at VA Loans Texas in Austin, Tx. "Home-based retailers and REITs also stand to benefit since these cuts improve consumer affordability and spending potential, which can drive up both home improvement demand and rental property values."

Here's a snap shot of the specific real estate stocks and funds industry experts like right now.

Homebuilder stocks. Mueller likes homebuilding stocks like D.R. Horton (DHI) and Lennar (LEN) right now, as they are "likely to see renewed interest from buyers with improved borrowing options," he notes.

DHI is up 7.74% for the year but down 6.59% over the past three months, signaling a modest "buy the dip" opportunity. Likewise, LEN is up 13.3% for the year but down 8.46% over the past month.

Real estate investment trusts. For investors looking at broader real estate exposure, REITs focusing on residential and commercial properties are a good option. "REITs like  AvalonBay Communities (AVB), for example, offer stability with growth potential tied to market rate conditions," he says.

Lofton likes the Realty Income (0) REIT, which primarily invests in free-standing, single-tenant commercial properties in the U.S. and Europe.

"I’ve been pounding the table about Realty Income (O) to anyone who’ll listen," she says. "Their triple-net lease model makes sense in this environment, and I love that monthly dividend for my retired clients."

Real estate fintech companies. Lofton is also keeping a close eye on Zillow (Z), whose stock is up 39% over the past three months. "Their latest tech investments are starting to pay off in ways I didn’t expect," she adds.

PropTech plays. One non-traditional option to consider is companies specializing in property technology.

"So-called ‘PropTech’ firms are revolutionizing how real estate transactions are conducted," Choate says. "These companies are not only adapting to current market conditions but are also setting new industry standards."

Sector investors who want to dip their toes in PropTech stocks may want to start with the PropTech ETF (PTEC), which invests in real estate technology firms. The market is expected to crest $100 billion by 2032, a 300% increase from 2023.

Global X, which owns and operates the fund, says the fund focuses strictly on the performance of property technology companies "that are positioned to benefit from technology that optimizes the way people buy, sell, rent, design, construct, manage, and research/market residential and commercial properties. “

The Takeaway on Rates and Real Estate

Even with an upbeat autumn, iIndustry experts advise caution on real estate stocks in the current interest rate climate.

"Investors should look beyond traditional metrics and consider the broader economic shifts influencing real estate," Choate says. "Diversification is key—exploring sectors like vacation rentals, which have shown resilience and adaptability, can be advantageous."

Also, take some time to choose wisely among sector stocks and funds.

"Real estate stocks aren’t the slam dunk they were in 2023," Lofton says. "You need to be pickier now. I’m telling clients to look at debt levels obsessively – the companies that loaded up on cheap debt during the zero-rate era might be in for a rough ride."

Lastly, focus on company financials when buying real estate stocks and funds.

"Investors should diversify within real estate, considering individual stocks and REITs," Mueller advises. "Focus on those companies with strong balance sheets, as they're well-positioned to capitalize on rate adjustments while navigating any potential inflationary or regulatory shifts."

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