Real estate stocks including Opendoor Technologies (OPEN -0.26%), Innovative Industrial Properties (IIPR 0.50%), and Compass (COMP -2.22%) were all moving higher this week in response to macroeconomic data that seemed to convince investors that the Federal Reserve could become more accommodative with its monetary policy and finally stop raising rates.
All three stocks, which operate a variety of real estate businesses, are highly sensitive to interest rates and mortgage rates, which make it harder for real estate companies to borrow and for prospective homebuyers and others to buy property.
Among the data that helped push the stocks higher this week was a personal consumption expenditures (PCE) report, the Fed’s preferred inflation gauge, showing that the trend in consumer prices continues to moderate, although the index ticked up modestly from June to July on a year-over-year basis, up 3.3%.
A weak consumer-confidence report also seemed to help convince investors that Fed policy could ease. Meanwhile, Friday’s jobs report showed only modest growth in employment, and the unemployment rate rose to 3.8% as more Americans entered the workforce, looking for jobs.
While rates on 30-year fixed mortgages remained above 7%, investors still saw those updates as a positive sign for the real estate sector.
According to S&P Global Market Intelligence, as of 2:23 p.m. on Friday, Opendoor was up 16.6% for the week, Innovative Industrial Properties had gained 14.3%, and Compass was 7.6% higher.
All three of these companies are exposed in different ways to interest rates, but they’re all sensitive to rates and, therefore, Fed policy.
Opendoor could be the most volatile of the trio. The company is best known as a home-flipping business, but that model has struggled as home prices have fallen and interest rates have risen.
Its stock is still down sharply from its peak, but has also tripled from its nadir at the end of 2022 on signs of an economic rebound and that a deep recession is likely to be averted.
As a business, Opendoor continues to look weak since it’s still significantly unprofitable and revenue has fallen as it’s pulled back on home-buying activity. Still, the stock is likely to be responsive to changes in mortgage rates and the housing market because it offers a high level of exposure to interest rates through its home-flipping business. If home prices start to rebound, Opendoor could generate significant profits.
Innovative Industrial Properties is a real estate investment trust (REIT) that owns cannabis facilities in a number of states. Like other property owners, the company is exposed to interest rates as rising rates raise the cost of capital for both itself and its tenants, making it more likely that they’ll default.
While the macro data seemed to help lift the stock this week, the real reason for its gains were due to signs that the U.S. could lower the classification of cannabis, reducing it from a Schedule 1 substance to Schedule III, which would make it easier for multi-state operators to do business. Naturally, that would benefit the REIT as cannabis growers are its customer base and it should benefit from growth in the industry.
Lastly, Compass is now the country’s largest real estate brokerage by transaction dollars, but like most real estate brokerages, it has struggled with the slowdown in the housing market as both inventory and prices are down. The company has billed itself as a tech-first brokerage with its own tech stack that its brokers use, but more recently its focus has been on driving profitability after the stock crashed from its peak in 2021, shortly after its initial public offering.
A turnaround in the housing market would certainly favor Compass since it would benefit from an increase in transactions.
The Fed is still giving mixed signals about its next moves at its upcoming meeting later this month, where it will decide whether to raise interest rates by another 25 basis points. While that could happen, the Fed still expects interest rates to fall over the long term, which is good news for the three stocks above.
Demand and prices won’t stay down forever, which should support a recovery in stocks like Compass and Opendoor, assuming they can prove their business models work.
Innovative Industrial Properties, meanwhile, is more dependent on the health of the cannabis industry than interest rates, but it would also benefit from easing monetary policy and an economic rebound.