The real estate market is experiencing a resurgence in 2024, with the S&P 500 Real Estate Select Sector SPDR XLRE showing an 11.1% year-to-date gain as of September 4th. After a downturn earlier in the year, the sector is now benefiting from positive expectations regarding the Federal Reserve’s (Fed) potential rate cuts and a decrease in mortgage rates.
The benchmark 30-year average mortgage rate dipped to 6.5% last week, its lowest point since May 2023, driven by signals from the Fed. This trend continued on August 30th, with the rate further declining to 6.37%. While the National Association of Realtors (NAR) anticipates an average 30-year fixed mortgage rate of 6.9% in its June quarterly forecast, this is a revision upward from their previous estimate of 6.7%. NAR also adjusted their forecast for the fourth quarter, projecting a rate between 6.5% and 6.7%. The association predicts a moderately lower mortgage rate environment in the second half of 2024, leading to higher home sales and price stability.
Despite the positive outlook, elevated mortgage rates have previously hindered affordability and dampened home sales. This pressure has also affected existing homeowners with adjustable-rate mortgages, leading to substantial increases in their monthly payments. The NAHB/Wells Fargo Housing Market Index (HMI), a gauge of overall confidence in the housing market, remained subdued in July, declining slightly to 42 from 43 in June.
However, the impending rate cuts, starting likely in September, combined with the downward trend in mortgage rates, present a more optimistic future for homebuyers. Even in the unlikely event of a recession, a larger inventory of homes could further reduce prices, making homeownership more accessible for first-time buyers.
With these factors in play, investors should consider allocating a portion of their portfolio to promising real estate stocks. Here are three such stocks with strong potential, all exhibiting positive earnings estimate revisions over the past 60 days and carrying either a Zacks Rank #1 (Strong Buy) or #2 (Buy):
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Two Harbors Investment Corp. (TWO):
This real estate investment trust (REIT) invests in mortgage servicing rights, residential mortgage-backed securities, and other financial assets. TWO boasts an anticipated earnings growth rate of 757.1% for the current year, with the Zacks Consensus Estimate for its current-year earnings increasing by 178% over the past 60 days. It currently holds a Zacks Rank #1.*
Tanger Inc. (SKT):
This REIT primarily focuses on shopping centers. SKT has an expected earnings growth rate of 6.6% for the current year, with the Zacks Consensus Estimate for its current-year earnings improving by 1.5% over the past 60 days. It currently carries a Zacks Rank #2.*
Dynex Capital, Inc. (DX):
This mortgage REIT has an anticipated earnings growth rate of 205.3% for the current year, with the Zacks Consensus Estimate for its current-year earnings enhancing by 33.3% over the past 60 days. It holds a Zacks Rank #2.As the real estate market shows signs of revival, these stocks offer promising investment opportunities for those seeking to capitalize on the potential rebound.
