We recently compiled a list titled Real Estate Investing For Beginners: 11 Best Stocks To Buy. In this article, we will look at where Digital Realty Trust, Inc. (NYSE:DLR) ranks among the best real estate stocks to buy for beginners.
Could the Fed Interest Rate Cuts Potentially Ease the Housing Market?
The Federal Reserve finally decided to cut rates beginning with a half-percentage point reduction on September 18. This long-awaited move lowered rates to a range between 4.75% and 5.00%. The big rate cut is believed to have a mixed effect on the housing market. Industry experts believe that this cut will motivate more people to list their homes and more homebuyers to enter the market.
Simultaneously, falling mortgage rates have also been spurring the demand from homebuyers. The question that keeps coming up is how mortgage rates dropping further might actually drive home prices up as more buyers enter the market. In an interview with Straight Arrow News, Selma Hepp, Chief Economist at CoreLogic, mentioned how mortgage rates dropped in early spring of 2023 and led to a huge buyer influx resulting in higher home prices. On the bright side, a lot of inventory will be freed after being locked in for a long time, also referred to as the mortgage lock-in effect. Thus, the easing of locked-in inventory would restrict home price appreciation if mortgage rates decline more.
Meredith Whitney, founder and CEO of Meredith Whitney Advisory Group, seconded Hepp’s views while talking to CNBC. While she sees housing as the most important issue over the next few years, she calls affordability the biggest major problem. In her view, rates need to fall by another 50 to 100 base points, and importantly, home prices need to go down by 15% for the market to be healthy again. Therefore, the next President should allow the housing market to decline by 15%. This would eventually lead to a cheaper market that more people can afford to enter.
On the other hand, the future outlook of commercial real estate post-Fed rate cut will be more positive, as suggested by Gil Borok, Colliers U.S. and Latin America CEO. He explained to CNBC that the 50-basis point cut will go a long way to help commercial real estate and will spur new investment sales activity. With stronger returns to the office, offices are being utilized differently as compared to the pre-pandemic era, but they are being utilized more which is a good sign. Hence, the rate cut move should jolt office occupancy and multi-family home production.
Analysts see another positive aspect on the supply side of the market as they believe that the rate cut will ease out financing conditions for homebuilders and get them building again. Taking into account the news that officials have pointed to another half-point reduction before the year’s end, the builder sentiment can highly improve and contribute to fixing the currently low housing supply.
In conclusion, interest rate cuts have brought down the mortgage rates and are expected to bring more buyers to the market. More buyers imply more competition between them which points towards higher home prices. The main problem of US housing still revolves around decades of underbuilding and a chronic shortage of homes. However, homebuyers can feel optimistic since lower mortgage rates will unfreeze the for-sale market as existing homeowners escape the rate lock-in effect. Considering that nearly 9 in 10 mortgage holders have a rate below 6% as visible from Redfin data, the lock-in effect going away will significantly ease the tight housing market.
Our Methodology:
We used the Finviz screener to create a list of 25 real estate stocks with the highest market capitalization, as of September 21. We then selected the 11 stocks from our list that were the most popular among elite hedge funds, as of Q2 2024. The stocks are sorted in ascending order of the number of hedge funds that have stakes in them.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Digital Realty Trust, Inc. (NYSE:DLR)
Number of Hedge Fund Holders: 44
Digital Realty Trust, Inc. (NYSE:DLR) owns, operates, and invests in carrier-neutral data centers. The company delivers the full spectrum of data center, colocation, and interconnection solutions. These flexible, secure, and scalable data center solutions are meant to support enterprises and service providers and to meet critical infrastructure needs. The firm was incorporated in Maryland in March 2004.
The company’s leading data center platform capitalizes on the growing global demand from a diversified customer base. Digital Realty Trust, Inc. (NYSE:DLR) has a global footprint with local expertise and connectivity to the locations that matter most with more than 300 data centers across more than 25 countries and more than 50 global metros. The company has a proven track record of sustainable growth as it has witnessed 20 years of consecutive revenue growth. Since the company’s focus is on data centers, digital transformation is expected to drive strong demand.
The strength of demand for data center capacity can be seen in the second quarter results of Digital Realty Trust, Inc. (NYSE:DLR). With $164 million of new leasing executed in this quarter along with the last quarter’s record leasing, the firm saw a record first half of the year. With record new log-ins and near-record bookings in each of the zero-to-one-megawatt and interconnection categories, the company also recorded one of the strongest quarters ever in the zero-to-one-megawatt plus interconnection segment.
Digital Realty Trust, Inc. (NYSE:DLR) remains well-positioned to take advantage of the demand for data center capacity especially for larger capacity blocks in its core markets. The firm expects to accelerate top-line and bottom-line growth for the remainder of 2024 which is a positive sign. As of Q2, the stock is held by 44 hedge funds.
Overall DLR ranks 6th on our list of the best real estate stocks to buy for beginners. While we acknowledge the potential of DLR as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than DLR but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published on Insider Monkey.
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