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Housing Market Under Siege: Time to Consider Real Estate Stocks?

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For investors who recall the real-estate collapse of 2008, chatter of a looming housing-market crash in 2023 brings back unsettling memories and palpable fears. Thus, the trillion-dollar question hangs like a dark cloud: Could sky-high mortgage rates decimate American home values and implode real-estate stock prices?

As usual, the answer is never cut-and-dried. Still, value hunters can and should seek out bargains, both current and potential, amid the wreckage of a battered stock sector. Hence, even while housing-market dislocations cause hardship to American families, at least there may be ripe-for-the-picking real-estate stocks for bottom fishers, dividend collectors, and enterprising investors of all stripes.

The Real-Estate Seesaw

Home prices and mortgage interest rates are up, and real-estate stocks are down. I call this phenomenon, which is somewhat but not entirely reminiscent of 2008, the real-estate seesaw of 2023.

It’s a consequence of multiple interest-rate hikes that, in hindsight, was inevitable. As the Federal Reserve deploys higher-for-longer interest-rate policy and the annual 30-year mortgage rate hurtles toward a previously inconceivable 8% (a recent report indicates 7.75%), the American dream of homeownership has become a veritable nightmare.

The upshot is a housing market that’s tighter than it’s been in recent memory. Current homeowners who secured a mortgage rate at around 3% a few years ago are understandably reluctant to sell their homes and purchase new homes with interest rates of 7% to 8%. Consequently, with few folks willing to sell their current homes, there’s a supply-and-demand imbalance and home prices are abnormally high.

Again, the effect resembles a seesaw as home-loan rates are up while mortgage applications are down because, quite frankly, many Americans simply can’t make the payments anymore. Amid this unsettling backdrop, government-backed mortgage lender Fannie Mae warned that U.S. home sales and mortgage-loan originations will slow down considerably in 2023, and then again in 2024.

In case that’s not enough to put homeowners and investors on high alert, the National Association of Home Builders (NAHB)/Wells Fargo (NYSE:WFC) homebuilder sentiment index declined year over year in September and came in below economists’ median forecast. A decline in prospective-buyer traffic was also observed in September – i.e., there’s a double-edged slowdown transpiring in builder sentiment as well as buyer enthusiasm.

Is a Real-Estate Crash Imminent in 2023?

With prospective home buyers putting off purchases until long-term rates subside – and with the Federal Reserve providing few if any hints of interest-rate cuts this year – the echoes of 2008 seem to only be getting louder. Is a real-estate collapse the only likely outcome, though?

Not necessarily. Remember, the Federal Reserve has the ability to respond to financial-market downturns (in homes, stocks, or elsewhere) with rate cuts; a recent example would be the Fed shifting from rate hikes in late 2018 to rate cuts in early 2019 in response to a sharp stock-market correction.

In other words, the Federal Reserve is undoubtedly monitoring the situation closely and can respond quickly if needed. Besides, today’s financial markets are highly efficient and if a real-estate market crash were to happen, it should have been foreseen and priced into home and stock prices by now.

And indeed, in the realm of stocks, there has been some pricing in. Hence, if you truly believe the old rhyme that volatility brings opportunity, it might not be a bad idea to buy some of the real-estate stocks that panicky traders are selling.

Real-Estate Stocks to Consider Now

First and foremost, let it be stated outright that a real-estate stock crash could still occur. So, be sure to have an exit strategy in case these stocks continue on their downward trajectories.

That being said, I recommend starting with a couple of well-established REIT kings that also happen to be dividend darlings. One is Realty Income Corp. (NYSE:O), which derives cash flow from more than 13,100 real estate properties. Realty Income Corp. has a lengthy track record of dividend payment increases, and the company pays a generous forward annual dividend yield of 6.19%.

Another other tried-and-true REIT standby is Simon Property Group (NYSE:SPG), a REIT that primarily focuses on shopping, dining, and entertainment business properties (including mall-based stores throughout the U.S.). Despite the recent downturn in SPG stock, Simon Property Group offers its loyal shareholders a hefty forward annual dividend yield of nearly 7%.

For less direct but no less promising real estate investment opportunities, you might also consider mortgage originator Rocket Companies (NYSE:RKT) as well as do-it-yourself home-improvement retailers Home Depot (NYSE:HD) and Lowe’s (NYSE:LOW). No matter how you approach it, real-estate stock investing in 2023 should provide a host of buy-low, sell-high opportunities for dyed-in-the-wool contrarians and passive-income enthusiasts everywhere.

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David Moadel
Financial Writer

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