R
eal estate has experienced a turnaround in recent months, with the S&P 500 Real Estate Select Sector SPDR (XLRE) advancing 11.3% year-to-date as of October 4. This shift began in September when central bank rate cuts were discussed, leading to increased optimism about mortgage rates. The 30-year fixed-rate mortgage has slightly risen since then, standing at 6.23% on October 6, but is expected to average 6.9% for the year, according to the National Association of Realtors (NAR). This upward revision from its previous forecast suggests that the second half of 2024 may see moderately lower mortgage rates and higher home sales.

    Despite this optimism, elevated mortgage rates have reduced affordability and dampened home sales. Existing homeowners with adjustable-rate mortgages are also feeling the pressure as their monthly payments increase. The NAHB/Wells Fargo Housing Market Index (HMI) indicates that overall confidence in the housing market remains subdued, although it did rise to 41 in September from 39 in August.

    New single-family house sales were at a seasonally adjusted annual rate of 716,000 in August 2024, which is 4.7% below the revised July rate but 9.8% above the August 2023 estimate. With potential rate cuts and decreasing mortgage rates on the horizon, there may be better times ahead for home buyers. In a recession scenario, a higher inventory of homes could bring prices down, attracting first-time buyers.

    Considering this outlook, it's worth investing in promising real estate stocks that have seen positive earnings estimate revisions in recent months. Our top picks are Tanger Inc. (SKT), CBRE Group, Inc. (CBRE), and NexPoint Real Estate Finance, Inc. (NREF). These companies have strong growth potential, with expected earnings growth rates of 6.6%, 23.7%, and 72.3% respectively.