Why Real Estate Stocks Were Hurting Today

It looks like high interest rates are here to stay for a while.

Hump Day proved to be insurmountable for real estate stocks. A great many of them saw notable dives in their stock prices, on worries that the chances for the Federal Reserve to cut its key interest rate were fading. From real estate investment trusts (REITs) to brokers to mortgage financiers, stocks across the sector took body blows during the Wednesday trading session.

Among the numerous real estate decliners were Easterly Government Properties (DEA -4.87%), with a nearly 5% drop, accompanied by fellow REITs Vici Properties (VICI -5.67%) and Kilroy Realty (KRC -7.33%) falling by a respective 6% and 7%. Transaction platform operator Opendoor Technologies (OPEN -10.58%) tumbled even more dramatically, losing nearly 11% of its value.

The inflation monster isn’t being tamed

More than most economic sectors, real estate is highly dependent on central bank interest rates. They not only affect the cost of mortgages for home buyers, but also impact developers looking to finance new projects.

Interest rates are relatively high these days due to the persistence of inflation, and it looks like they’ll remain elevated. Wednesday morning, the government’s Bureau of Labor Statistics released its latest gauge of inflation, the monthly consumer price index (CPI) update, and it wasn’t good. Inflation rose by 3.5% year over year in March, which was higher than economists expected, and exceeded February’s 3.2%.

One of the many uncomfortable aspects of this is that the Fed’s goal of enacting a series of rate cuts this year looks far less likely. For many, it feels as if those high rates are here to stay.

And that might be a best-case scenario. If inflation pushes higher for another month or several, it’s very possible that the Fed will revert to its recent habit of raising rates, putting even more of a squeeze on borrowers. That won’t be good news for house hunters, the developers looking to build new homes, or property landlords. This is why stocks in a wide variety of real estate segments were out of favor on Wednesday; nearly all are potentially affected.

Realistic about real estate

That being said, housing demand remains strong despite the very real prospect of pricier mortgages and development loans. The U.S. economy continues to motor along, and would-be homeowners are still willing to pay very handsomely for real estate. As with many investor knee-jerk reactions, I think this one was overblown. However, those concerns are realistic, and perhaps the sector isn’t the most ideal one for portfolio-building just now.

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Opendoor Technologies and Vici Properties. The Motley Fool recommends Easterly Government Properties. The Motley Fool has a disclosure policy.

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