Investors may think that home prices are the only way to play the real estate sector, whether by investing in physical property or crowdfunding platforms that allow retail investors to tap into the income and appreciation potential from owning a share in a portfolio of properties. However, there are other lateral plays that offer a much better risk-to-reward ratio.
As home prices now hit a new all-time high, with the average home price hovering at $501,700, investing in single-family homes has very little upside left in this cycle, with much more to lose at the risk of a pullback. Other niches of the real estate sector haven’t yet caught up to the rise in home prices, which is where investors can tilt the reward scale in their favor, such as real estate investment trusts (REITs), Zillow Group Inc. (NASDAQ: Z) as a technology platform, and even property developer CBRE Group Inc. (NYSE: CBRE).
Wall Street analysts forecast double-digit growth in these stocks. The state of the housing market is going to cause a potential bottleneck once the Federal Reserve (the Fed) cuts interest rates and sparks new home demand, so all stocks on this list pose a potential to catch up to home prices in the coming quarters. More specifically, the CME’s FedWatch tool predicts these rate cuts will come by September 2024, giving investors a timeline to think about this trend.
This Real Estate ETF Needs to Catch Up to Surging Home Prices
Since the Fed dropped interest rates in 2020 as a response to the COVID-19 pandemic, home prices have risen by nearly 35% on average. They have only slowed down during the past year as the Fed has now hiked rates to fight stubborn inflation rates hurting the economy.
Still, prices did not come down on these rate hikes, meaning people locked in a low-interest mortgage during that cycle are unwilling to let go of their cheaply financed homes, so prices have stayed at the highs. However, when investors look at the Vanguard Real Estate ETF (NYSEARCA: VNQ), it has basically been flat since 2020.
Going from $93.5 pre-COVID in 2019 to $93.1, where it trades today, this ETF (which is supposed to keep up with average home prices) has underperformed the physical housing market by over 35%. Why the performance gap? Well, this ETF holds mostly multi-family and apartment REITs, an asset class that is about to catch up.
This trend will result from the underlying indicators of the housing market, such as building permits and housing starts (the market's supply side), coming down by as much as 8.5% in the year. Tightening supply in this area could start to drive prices higher, especially as rental demand is expected to stay strong for a while.
Now, this ETF lays the foundation for the asymmetric risk-reward ratio in the real estate sector, which investors should consider. However, there is a middleman who offers a much more aggressive deal.
Zillow's Financial Momentum Attracts New Wave of Buyers
Over the past quarter, Zillow’s earnings press release showcased a 13% jump in revenues over the past year, which sparked the interest of a few on Wall Street. But there are more important metrics to look at inside Zillow.
Speaking of the trend in multi-family and apartments, Zillow reported up to $117 million in revenue coming from the rental space, or 29% growth over the year. On the other hand, residential property only saw 8% revenue growth during the same period. Investors should focus on this to find the next wave of upside in real estate.
Zillow acts as the middleman between renters and landlords, buyers and sellers, so now that rental demand is going to get more competitive due to the lack of new construction, Zillow could deliver better growth in the next few quarters as revenues and fees could set to take off.
Wall Street analysts know this, so they forecast Zillow’s earnings per share (EPS) to go from a net loss of $0.33 this year to a net profit of $0.27 in the next 12 months. This swing into profitability led those at the Vanguard Group to boost their position in the stock by 0.8% in the past quarter, netting their investment at $1 billion today.
Demand for New Development Puts Pressure on CBRE Stock
But the good kind of pressure: As the stock now trades at 97% of its 52-week high, investors can take this price action as a bullish sign for the company's future. Why? Because a stock that trades this close to the highs during a contracting construction industry is always a good sign.
CBRE specializes in developing commercial properties just as much as they develop residential properties like multi-family and apartments. Knowing that Zillow's rental segment has already taken off so aggressively, it should be easy for investors to imagine that demand will now come to CBRE as a need to build more units.
This could be one reason why Wall Street analysts now forecast up to 21.4% EPS growth for the company's next 12 months. These trends also helped Raymond James land on a $124 price target for CBRE stock, calling for up to 8% upside from where it trades today.
As CBRE stock's short interest declined by 7.3% in the past month, investors have also noticed signs of bearish capitulation recently, which makes sense as the bullish evidence and momentum stack up.