The real estate sector’s unique view of 2024 — and what’s to come

Ayush April 18, 2024

This is The Takeaway from today’s Morning Brief, which you can sign up to receive in your inbox every morning along with:

Despite a rough few days for the S&P 500, which is still comfortably in the green this year (up 6%), one sector of the stock market is feeling more pain than the rest.

The perception that rates might stay higher for longer is hammering the real estate sector, even as debate rages about how many times — if any — the Federal Reserve will cut rates this year.

The group is far and away the worst performer in the S&P 500 for 2024, down more than 10%. The bulk of those declines have come in the past two weeks, as Treasury yields have climbed to their highest level since November and investors traverse the acceptance phase that the hoped-for cuts are not on their way.

Now investors are faced with the question of whether to buy the dip or, to quote another market cliché, risk trying to catch a falling knife.

One real estate investor said the rent indicators she’s seeing in real time are encouraging on the inflation front. That’s in contrast to the much-criticized rental barometers that the Fed relies on.

“If you take into account real-time shelter costs, it’s much lower than what’s in the prints,” Uma Moriarity, senior investment strategist at CenterSquare, told Yahoo Finance. “We think inflation is trending in the right direction.”

That’s why she’s still confident in three rate cuts this year — a view, of course, that the market has been moving away from. It’s also why she’s still confident in real estate. That, plus the fact that stocks are relatively cheap.

The reasons that real estate stocks suffer when rates are on the rise are twofold. First off, the companies tend to carry a lot of debt, and as rates go higher, it becomes more difficult to service or refinance that debt. Secondly, with relatively high dividend yields, the stocks compete with instruments like money market funds for investing dollars.

It’s traditionally been tough for real estate stocks to rally in the face of rising rates. But if Moriarty — and Citigroup — are right, they might not be rising for as long as the broader market anticipates.

Julie Hyman is the co-anchor of Yahoo Finance Live, weekdays 9 a.m.-11 a.m. ET. Follow her on Twitter @juleshyman, and read her other stories.