SA Roundtable: Which housing stocks are most sensitive to rate cuts?

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Which segments of the housing market would react quickest to declining interest rates, and which would react more slowly?

In a recent Seeking Alpha readers poll, 26.4% of respondents said they believed mortgage lender stocks would react most quickly, followed by homebuilder stocks/ETFs with 24.6%, REITs with 23.2%, and home improvement stocks with 14.7%. The remaining respondents were split between mortgage REITs/MBS funds and digital real estate companies.

We asked Seeking Alpha analysts Pacifica Yield [https://seekingalpha.com/author/pacifica-yield], REITer's Digest [https://seekingalpha.com/author/reiter-s-digest], and Dr. Christopher Davis of Quad 7 Capital [https://seekingalpha.com/author/quad-7-capital] for their thoughts.

_WHICH SEGMENT OF THE REAL ESTATE MARKET WOULD REACT QUICKEST TO DECLINING RATES?_

Pacifica Yield [https://seekingalpha.com/author/pacifica-yield]: REITs that will get a boost from a reduction in their borrowing costs, while hedged from short-term macroeconomic volatility through long-term triple-net leases, should drive the most alpha in a rate-cutting environment. The life sciences and healthcare sector presents a compelling opportunity, as leases tend to be longer-dated and come with annual rent hikes. I've been buying Alexandria Real Estate Equities (ARE [https://seekingalpha.com/symbol/ARE]) with its weighted-average lease term of 7.4 years across a portfolio where 97% of leases came embedded with annual rent escalations.

REITer's Digest [https://seekingalpha.com/author/reiter-s-digest]: Mortgage REITs and mortgage funds move quickly on an interest rate cut because their portfolios of floating rate loans mark to market daily, and spreads reprice quickly. Lower rates have a quick impact on cash flow. Homebuilders are also rate sensitive given their reliance on mortgage availability.

Dr. Christopher Davis [https://seekingalpha.com/author/quad-7-capital]: When rates come down meaningfully, which is not just a quarter point but substantially more, residential demand spikes; however, commercial sectors that are very capital intensive and debt laden tend to react the fastest, in our opinion. Thus, we think REITs are largely set to benefit. Refinancing costs will be lower on maturing debt compared to a year ago or even today. Tenants will have easier access to capital to pay obligations. It’s a windfall for the space as a whole.

Within REITs, some of the more specialized spaces, like data centers and healthcare, which are growing and expanding while relying very heavily on debt, are likely to respond more rapidly than the average REIT. We have liked accumulating select names in the space over the last year in anticipation of cuts in 2025 and 2026.

_WHICH SEGMENT WOULD REACT SLOWEST?_

Pacifica Yield [https://seekingalpha.com/author/pacifica-yield]: Mortgage REITs, especially those with investment portfolios that are broadly floating rate but have proportionally more fixed borrowing costs, will react the slowest. While these should eventually benefit from a healthier mortgage refinancing environment on rate cuts, this will take some time. Mortgage REITs in sectors more exposed to short-term economic volatility, like lodging and multifamily, would also react the slowest. Arbor Realty Trust (ABR [https://seekingalpha.com/symbol/ABR]), for example, focuses on lending to multifamily properties in Sunbelt States that continue to see rents drop, a risk heightened by a rising unemployment rate.

REITer's Digest [https://seekingalpha.com/author/reiter-s-digest]: Equity REITs react slowly, since their fundamentals, such as rent growth, occupancy, and transaction rates, all move slowly. While lower rates eventually matriculate through a REIT positively, improving their cost of capital and valuation, their effect takes time. Equity REIT valuations are also typically heavily tied to the yield of the ten-year treasury, meaning a more significant change to the federal funds rate may be necessary to see an impact.

Dr. Christopher Davis [https://seekingalpha.com/author/quad-7-capital]: While we think the whole sector stands to gain, those that are more exposed to business cycles, or the business cycles of their tenants, probably would have a more muted reaction. Hotel and lodging REITs, while capital intensive and debt laden, are really more sensitive to the state of the economy and travel. While lower rates help consumers spend, the impact of lower rates will take a lot longer to trickle down to this space. The same can likely be said for retail-related REITs.

More broadly, those with long leases locked in also will see a delayed impact to some degree. But to be clear, from builders to offices to diversified and specific real estate-related plays, they all stand to benefit.

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