Real estate stocks soar to best day of the year on rate cut bets

The stock market's worst group is having its best day of the year as a cooler-than-expected inflation report stokes bets that the Federal Reserve will start cutting interest rates in September.

Shares of real estate companies jumped as much as 3.1% Thursday for their biggest intraday gain of 2024, climbing to their highest level since March as investors snap up homebuilder, digital and commercial real estate stocks alike. Real estate also is the best-performing group in the S&P 500 Index Thursday, with volume that's around 65% higher than the 30-day average, according to data compiled by Bloomberg. 

Arguably the most significant news to come from the latest consumer price index reading was a pullback in housing-related inflation. Shelter costs rose just 0.2% for the slowest monthly increase in three years. Homebuilders, which have risen 6% this year, are up nearly 7% for the session. Shares of D.R. Horton Inc., which is scheduled to report earnings next Thursday, gained as much as 7.4%. 

"Housing has really been the last shoe to drop in terms of winning the battle against high inflation," Preston Caldwell, chief U.S. economist at Morningstar wrote in a note to clients Thursday. "Leading-edge data has strongly indicated for some time now that a fall in housing inflation was in the works."

A rally in real estate stocks is bad news for short sellers who have been piling into the group, which is the worst performer in the S&P 500 this year. To start the week, short interest as a percentage of float hovered near 49% in the SPDR Homebuilders ETF, the highest level since February for the exchange-traded fund, according to data from S3 Partners.

Property owners are rallying as well. Real estate investment trusts, which were brutally penalized during the two-year run up in borrowing costs, advanced by as much as 3%. The outlook for the group appears to have turned a corner, according Rich Hill, senior vice president and head of real estate strategy and research at Cohen & Steers Capital Management.

"We think this is a compelling backdrop for listed REITs especially as fundamental growth remains on solid footing," he said, referencing the latest inflation data and rate outlook. "The rally that started in October of 2023 pushing returns more than 20% above their trough looks set to continue if inflation cools and interest rates continue to decline." 

Shares of industrial REIT Prologis Inc., which reports second-quarter results on Tuesday, rose as much as 3.6% to hit their highest intraday level since April. U.S. Treasury yields tumbled, with the 10-year bond falling below 4.2% and the policy-sensitive two-year note slipping to 4.5%.