The market generally expects the Federal Reserve to initiate a rate-cutting cycle, which may bring investment opportunities in the U.S. real estate sector. Typically, the health of the real estate market is negatively correlated with interest rates. Therefore, once the Federal Reserve enters a rate-cutting phase, investment targets in the U.S. real estate market will become more attractive.
The relevant U.S. real estate market targets can be broadly divided into three categories: home builders represented by DR Horton; non-residential and residential real estate service companies represented by CBRE and Zillow; and equity commercial real estate REITs represented by Simon Property. Additionally, in a broader sense, mortgage REITs like AGNC, light asset service platforms related to real estate such as Airbnb, and REITs like American Tower Corporation (AMT) can also be considered part of the real estate sector.
Interest rates are a significant factor in the U.S. real estate cycle.
Excluding the special circumstances following the 2007 financial crisis, historical data indicates that U.S. rate-cutting cycles are usually accompanied by rising home prices. Although the correlation between new construction starts, investments, and interest rates is not as strong as with home prices, they are also significantly affected by interest rates and are related to housing construction policies and macroeconomic conditions.
Within the real estate sector, the relationship between different sub-industries and companies with interest rates varies significantly. REITs like EQR have a close relationship with interest rates, and their pricing usually anticipates interest rate changes, often reflecting price performance slightly ahead of actual rate changes. Homebuilders' stock prices also have a relationship with interest rates but tend to be more stable. Their revenue and performance may continue to grow, driven by strong expansion momentum despite lower profit margins. However, during financial crises, homebuilders' fundamentals and stock prices often suffer more severely. By contrast, the performance of commercial real estate investment and service companies (such as CBRE) and real estate online information platforms (such as Zillow) relies more on their intrinsic capabilities and is relatively less correlated with interest rates.
In the previous atypical rate-raising cycle, the performance of the U.S. real estate industry deviated from traditional patterns.
Since March 2022, the U.S. entered a rate-raising cycle, leading to higher mortgage rates and a decline in home sales. According to data from the U.S. Census Bureau and the National Association of Realtors, house sales in 2022 and 2023 fell by 17.1% and 16.6%, respectively, while new construction starts decreased by 3.3% and 8.4%, respectively. Nevertheless, home prices rose against the trend during the rate-raising cycle, likely due to insufficient existing home supply, strong demand driven by high employment rates, and domestic policy factors. During this period, EQR's stock price continued to show a negative correlation with U.S. Treasury yields. CBRE and Zillow were more sensitive to the periodic fluctuations in Treasury yields, while homebuilders like Horton Homes maintained an upward trend in their stock prices during the rate-raising cycle.
Risk Warning:
Although interest rates are a crucial factor affecting the real estate market, they are not the only factor. Analyzing the real estate market in mature economies requires consideration of multiple aspects, such as policy regulations, market housing ownership rates, and housing holding conditions. Furthermore, the Federal Reserve's rate-cutting window itself is uncertain, and the comparability of historical cycles is limited. The preliminary conclusions of Citic Securities need to be verified against the current actual situation.
Forecast for the Upcoming Rate-Cutting Cycle in the U.S. Real Estate Market.
Based on factors such as the starting point of the rate cuts, the economic environment, housing ownership rates, and technological changes, Citic Securities predicts that this round of U.S. rate-cutting cycle may resemble the cycle from 1995-1998 while having some comparability with the cycle from 1989-1992 in terms of home price performance. It is anticipated that U.S. home prices will still have room to rise during the rate-cutting cycle, with indicators like sales, investments, and new construction starts also showing improvement. This is a positive signal for the real estate sector, including REITs and homebuilders. Historical data suggests that REITs show greater stability, while homebuilders demonstrate more business expansion flexibility.
