The biggest beneficiary sector of the Fed rate cut: US real estate stocks?

Overnight, US tech stocks plummeted, with the Nasdaq plunging 2%, while the worst-performing real estate sector of the year saw its biggest increase, driven by market expectations of interest rate cuts leading to industry rebound.

On Thursday, the US real estate sector rose by 2.7%, marking the largest single-day increase since 2024 and reaching the highest level since March. Real estate had been the worst-performing sector this year, but on that day, it became the best-performing sector in the S&P 500, with trading volume about 30% higher than the 30-day average.

Among them, shares of homebuilders rose by 7.3% on the day, marking the largest increase since 2022 and a cumulative increase of 7.1% so far this year. Real Estate Investment Trusts (REITs) also rebounded, with an increase of up to 3%. During the past two years of high-interest rates, REITs have suffered significant setbacks.

Rich Hill, Director of Real Estate Strategy and Research at Cohen & Steers, commented:

The outlook for this sector seems to have turned a corner, considering the latest inflation data and interest rate outlook. We believe this provides a convincing backdrop for listed REITs, especially with solid fundamental growth. If inflation continues to cool and interest rates continue to decline, the rebound that began in October 2023 may continue, driving returns up by over 20% from the low point.

The sharp rise is attributed to the boost from interest rate cut expectations, as the US June CPI "cooled off" and the US June core CPI hit a new three-year low, with stubborn housing inflation rapidly cooling, leading the market to increase bets on the Fed starting rate cuts in September.

Preston Caldwell, Chief US Economist at Morningstar, stated in a client report on Thursday:

In the process of overcoming high inflation, housing is the last issue to be addressed. Leading indicators strongly suggest that the decline in housing inflation is underway.

However, the rebound in real estate stocks is bad news for short sellers. Short sellers have been heavily shorting real estate stocks this year as it has been the worst-performing sector in the S&P 500. According to data from S3 Partners, the short interest in the SPDR Homebuilders ETF has been hovering around 49% of outstanding shares this week, the highest level since February