The stars seem to be aligning for real estate stocks, setting the stage for a potential structural rebound after years of lackluster performance. As the economy shows robust growth and inflation continues its downward trend, investors are increasingly optimistic about the Federal Reserve’s anticipated interest rate cuts. This optimism is sparking renewed enthusiasm for real estate investments.
Investors have channeled significant capital into real estate investment trusts (REITs) in August, speculating on the much-anticipated decline in borrowing costs as a factor to revitalize the sector. Bank of America reports that their private clients flocked to REIT exchange-traded funds (ETFs) in August, driving the highest weekly inflow since March 2024. A staggering $0.8 billion poured into these funds, marking the longest four-week streak since March 2022.
According to data from TradingView, the top five real estate ETFs collectively attracted over $2.4 billion last month alone. This amount represents a staggering two-thirds of their total inflows for the past year. Here’s a breakdown of the leading ETFs by inflows:
*
iShares U.S. Real Estate ETF:
$853.814 million (1-month) and $1.328 billion (1-year)*
Vanguard Real Estate ETF:
$650.912 million (1-month) and $42.887 million (1-year)*
Real Estate Select Sector SPDR Fund:
$600.587 million (1-month) and $2.105 billion (1-year)*
SPDR DJ Wilshire REIT ETF:
$168.303 million (1-month) and $129.095 million (1-year)*
iShares Residential and Multisector REIT ETF REZ:
$136.758 million (1-month) and $92.397 million (1-year)In terms of market performance, the Real Estate Select Sector SPDR Fund (XLRE) surged over 4% in August, making it the second-best performing sector behind consumer staples. Year-to-date, the real estate sector has lagged behind the broader market, trailing the SPDR S&P 500 ETF Trust (SPY) by 10 percentage points. However, in the past two months—coinciding with increased expectations for rate cuts in September—real estate stocks have posted a remarkable 14% gain, significantly outpacing the S&P 500’s modest 3% increase during the same period.
Earnings for real estate companies are also beginning to exceed expectations. John Butters, senior earnings analyst at FactSet, highlighted that “At the sector level, the Health Care (86%), Real Estate (84%), and Industrials (82%) sectors had the highest percentages of companies reporting earnings above estimates.”
On the data front, there’s more good news for U.S. homebuyers as mortgage rates continue their downward trajectory. For the week ending August 23, the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances (up to $766,550) dipped to 6.44% from 6.50%, marking the lowest level since April 2023 and the fourth consecutive week of declines.
Recent economic data has also dispelled fears of an imminent recession. The U.S. economy grew at an annualized rate of 3% in the second quarter, surpassing earlier estimates of 2.8% and more than doubling the 1.4% growth recorded in the first quarter. This marks the eighth consecutive quarter of expansion, driven by a significant upward revision in consumer spending.
