Fintech News APP learned that Citic Securities released a research report forecasting that the upcoming US rate cut cycle may also bring investment opportunities for the real estate sector in the United States. Generally speaking, interest rates are a key factor affecting the US real estate cycle. Although the US real estate industry performed atypically during the last rate hike cycle, the performance of large REITs in the United States is significantly negatively correlated with interest rates, but may change in advance of interest rate changes. US home builders have developed rapidly in the past and may also benefit from rising house prices, increased housing investment and construction, but history has shown that their risk resistance ability is inferior to property holders in extreme environments.

The market expects the Fed to begin a rate cut cycle.

Generally speaking, the prosperity of the real estate market and interest rates are negatively correlated, so once the Fed initiates a rate cut cycle, investment targets related to the US real estate market are also worth paying attention to. US real estate-related targets can be roughly divided into three categories: Home Builders represented by DR Horton; Non-residential and residential real estate service companies represented by CBRE, Zillow, etc.; and Equity Commercial Real Estate REITs represented by Simon Property. Of course, from a broad perspective, Mortgage REITs such as AGNC, lightweight asset service platforms related to real estate such as AirBnb, REITs such as AMT (American Tower) can also be regarded as part of the real estate sector.

Interest rates are an important factor affecting the US real estate cycle.

Except for the crisis response period after 2007, the US rate cut cycles in other periods corresponded to rising house prices. The performance of new starts and investments is also related to interest rates, but the degree of correlation is not as strong as that of price signals. The situation of new starts and investments is related to the housing construction policies and the degree of macroeconomic prosperity at that time.

The historical performance of the real estate sector is generally negatively correlated with interest rates, but there are still huge differences among different sub-industries and companies.

The relationship between EQR and other REITs and interest rates is very significant, but REITs' pricing generally has a certain forward-looking nature to changes in interest rates, that is, the related price performance is slightly ahead of the actual changes in interest rates. The stock prices of home builders are somewhat related to interest rates, but their performance is usually more stable, and their revenue and performance may continue to grow, although their profit margins are thin, they have strong potential for multi-channel expansion. However, during the financial crisis in history, the fundamentals and stock prices of home builders were more severely affected than REITs, and commercial real estate investment and service companies (such as CBRE), real estate online information platforms (such as Zillow) have greater relevance to their own business capabilities, and less relevance to interest rates. In periods when the real estate industry is relatively weak, the potential social demand for these companies may be greater, but they may also face problems of tighter customer budgets and lower buying frequency. Therefore, for the real estate service industry, the layout and development potential of its own business are more important. How to avoid risks such as Zillow launching house resale business may be more critical than playing interest rates.

US real estate industry performance during the last atypical rate hike cycle.

In March 2022, the United States entered a rate hike cycle, leading to an increase in mortgage rates and a decrease in home sales. According to the US Census Bureau and the National Association of Realtors, home sales in 2022 and 2023 respectively declined by 17.1% and 16.6% year-on-year, and the number of new starts respectively declined by 3.3% and 8.4% year-on-year. The trend of house prices has'seldomly' continued to rise during a rate hike cycle. This may be related to the shortage of existing house supply, strong demand under high employment rates, and some domestic policy factors in the United States. Since the rate hike cycle in 2022, EQR's stock price has been continuously negatively correlated with Treasury yields, CBRE and Zillow are more sensitive to fluctuations in periodic Treasury yields, and the stock prices of home builders such as Horton continue to rise during the rate hike cycle.

Risk warning:

From the perspective of research methodology, although interest rates are a key indicator affecting the real estate market, they cannot be the only indicator. Analyzing the ups and downs of the real estate market in mature economies can start with interest rates, but it also needs to comprehensively consider many factors such as policy regulations, the homeownership rate of the US market, and the current housing ownership status. The opening of the Fed's rate cut window itself has uncertainty. Due to comparable historical cycles, including 1989 and 1995, social and economic environment, especially technological factors, have undergone significant changes since then, and the competitive landscape in sub-industries has also changed greatly. The performance of the market after the rate cut may be different from historical situations, and the preliminary conclusions drawn by Citic Securities also need to be combined with the current reality.

The preliminary determination of the US real estate cycle after the rate cut.

Based on factors such as the starting point of the rate cut, economic environment, homeownership rate, and social technological changes, Citic Securities predicts that this round of US rate cuts may have similarities with the 1995-1998 cycle, while the 1989-1992 cycle has a certain comparability in terms of historical house price performance. Citic Securities estimates that there is still room for US house prices to rise during the rate cut cycle, and sales, investment and construction will likely increase. This is a positive factor for the real estate sector, including REITs and home builders. Historical data shows that REITs are more stable, while home builders may have more business expansion flexibility.