Expectations of interest rate cuts are rising, and US real estate stocks surged to achieve the best single-day performance of the year

According to the latest inflation report in the United States, the market is betting that the Federal Reserve may start cutting interest rates in September, injecting vitality into the previously weak real estate sector, leading to a significant increase. On Thursday, real estate company stocks saw a significant increase, rising by 2.7%, marking the best performance in a single day since 2024 and reaching the highest point since March. Investors flocked to residential builders, digital, and commercial real estate stocks, making real estate the best-performing sector in the S&P 500 index, with trading volume about 30% higher than the 30-day average.

The housing cost component of the Consumer Price Index is particularly noteworthy, rising only by 0.2%, the lowest monthly increase in three years. This decline had a positive impact on residential builders' stock prices, which had already risen by 7.1% this year, with a 7.3% surge in stock prices on that day, marking the largest increase since 2022. D.R. Horton (DHI.US), a company set to announce its earnings next Thursday, also saw a 7.3% increase in its stock price.

Preston Coedwell, Chief U.S. Economist at Morningstar, pointed out in a report to clients, "The housing market is a key battleground against high inflation. Leading data strongly indicate that housing inflation is declining."

The rise in real estate stocks is bad news for investors who have heavily shorted such stocks, as real estate stocks are among the worst-performing stocks in the S&P 500 index this year. According to S3 Partners data, at the beginning of this week, short positions in the SPDR Homebuilders ETF accounted for as much as 49% of the outstanding shares, reaching the highest level since February.

It is worth noting that Real Estate Investment Trusts (REITs) also saw an increase, rising by 3%. These funds have suffered during two years of rising borrowing costs. Richie Hill, Senior Vice President and Director of Real Estate Strategy and Research at Cohen & Steers Capital Management, stated that the outlook for REITs seems to be improving. Referring to the latest inflation data and interest rate outlook, he said, "If inflation cools and rates continue to fall, the rebound that began in October 2023 is expected to continue, bringing over 20% returns to listed REITs."

Industrial real estate investment trust company Prologis (PLD.US) saw a 3.3% increase in its stock price after announcing second-quarter earnings, reaching the highest level since April. At the same time, U.S. Treasury yields fell sharply, with the 10-year Treasury yield dropping to 4.2% and the more policy-sensitive two-year Treasury yield falling to 4.5% Overall, the lower-than-expected inflation report has brought a positive signal to the market, leading investors to reassess the prospects of the real estate sector and driving strong performance of related stocks. With the cooling of inflation and the potential decline in interest rates, the real estate industry may see more investment opportunities ahead