3 Real Estate Stocks to Buy if Interest Rates Start Going Down
It appears that interest rates may have peaked, at least for this economic cycle. The Federal Reserve has pivoted from its rate hiking campaign toward a more dovish outlook. Economists now expect multiple rate cuts in 2024 as the Fed turns its attention from inflation to unemployment.
Not surprisingly, this should have a positive impact on the housing market. Mortgage rates had spiked to levels not seen in many years, which had made folks reluctant to purchase houses. However, with rates now moving back down, the housing market should gain steam in 2024.
According to Bankrate, the average U.S. 30-year fixed mortgage rate peaked at 8.09% during the week of Oct. 27th, 2023. By contrast, that has fallen more than a full percentage point to 7.01% today. With this significant relief for the housing market, it’s time to pick up these three real estate stocks.
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Lennar (LEN)
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Lennar (NYSE:LEN) is one of the nation’s leading homebuilders. The company builds many thousands of homes every year across the nation. Specifically, last quarter, Lennar delivered 23,795 homes and announced new home orders of 17,366.
Despite rising interest rates throughout 2023, Lennar reported strong results, easily topping analyst expectations. Even with interest rates at their peak, Lennar was performing well. Now that rates are sliding, Lennar will see that former headwind dissipate.
In addition to Lennar’s strong macroeconomic outlook, things look good on a more detailed level as well. Analysts are enthused about Lennar, and the company just raised its dividend dramatically. This adds further momentum to Lennar’s rally.
First American Financial (FAF)
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Title insurers are one of the best types of real estate stocks for falling interest rates. Title insurance is a niche financial product that people buy when taking out housing and commercial real estate mortgages; the insurance protects against any defects against a property deed, such as back taxes or conflicting wills.
First American Financial (NYSE:FAF) is one of the big four American title insurance firms. These four, combined, make up about three-quarters of the overall market. In firms with relatively low competition selling a product that is essential, margins tend to be high and stable. And indeed, title insurers have tended to deliver higher returns than insurance as a whole.
Title insurers have had a down couple of years due to higher interest rates. They earn fees both on new home sales but also property refinancing transactions. Refis, understandably, dried up almost entirely with the surge in interest rates. Now that rates are coming back down, however, demand for housing should rise and people will start refinancing their prior real estate deals that were made at higher interest rates in 2022 and 2023.
First American saw earnings fall sharply in 2023 given the real estate headwinds. Even so, shares are still selling for less than 15 times trough earnings, and shares will look much cheaper as earnings rebound. FAF stock also pays a healthy 3.5% dividend yield.
Tecnoglass (TGLS)
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Tecnoglass (NYSE:TGLS) is a company which manufactures windows and architectural glass. Historically, building materials are highly correlated to interest rates, and understandably so given that they these firms are vital in the construction of all new real estate projects.
Tecnoglass came public via a SPAC in the mid-2010s and took years to find any traction with investors. However, shares have blasted off since 2020, rising from the mid-single digits to as high as $50 as the housing market boomed. The company has earned accolades for its performance among small-cap stocks.
Technoglass has an interesting business model. While the company’s headquarters is in Miami, the firm was founded in the nation of Colombia and its primary manufacturing facilities remain in Barranquilla, Colombia, next to that country’s principal port. The management team wisely realized that it could take advantage of cheap shipping and the low cost of labor to build windows cheaply in Colombia and export them into southeastern U.S. markets such as Florida.
The company’s revenues grew from $371 million in 2018 to an anticipated $835-$848 million for 2023. As Tecnoglass keeps expanding its factory and distributing into additional states, its growth should remain strong. TGLS stock dipped in mid-2023 as investors sold off due to higher interest rates. With rates now reversing, however, Tecnoglass should be set to move higher once again.
On the date of publication, Ian Bezek held a long position in FAF stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.
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