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Real estate stocks took a tumble this week after four weeks of consecutive gains. This decline reflects a shift in investor sentiment as hopes for a near-term interest rate cut by the Federal Reserve dimmed.

The Real Estate Select Sector SPDR Fund (XLRE), a key benchmark for the sector, dropped 3.64% compared to the previous week, closing at $37.35 on Friday. This mirrored broader declines across real estate indexes, with the Dow Jones Equity All REIT Total Return Index falling 3.53% and the FTSE Nareit All Equity REITs down 3.20%. Notably, the broader S&P 500 managed to eke out minimal gains of 0.03% during the same period.

The Federal Reserve’s hawkish stance appears to be the main culprit behind the downturn in real estate stocks. Minutes from the Fed’s latest meeting revealed a central bank focused on seeing further progress towards its inflation goals, suggesting rate cuts may not be coming as soon as investors had anticipated. This uncertainty rattled investor confidence, leading to a decline in net inflows into the XLRE ETF compared to the previous week.

Adding to the bearish sentiment, a recent survey by the American Association of Individual Investors (AAII) showed an increase in investor pessimism about the short-term stock market outlook. This aligns with Seeking Alpha’s Quant Rating system downgrading XLRE from “Hold” to “Sell” this week.

Despite the recent dip, some analysts like SA’s analysts maintain a “Buy” rating on XLRE. Additionally, the housing market itself continues to see rising home prices, albeit at a slower pace due to elevated mortgage rates. New listings are picking up, but overall inventory remains below pre-pandemic levels.

Within the real estate sector, industrial REITs took the biggest hit this week, falling 6.06%. This subsector faces moderating demand and rising vacancy rates for the rest of 2024, according to a report by Baird Equity Research. Office REITs weren’t far behind, experiencing a decline of 5.13% week-over-week. Both subsectors saw occupancy drops in Q1, contributing to the overall decline in occupancy rates for the broader REIT sector.

While the immediate outlook for real estate stocks seems uncertain, long-term prospects remain dependent on the trajectory of interest rates and the overall health of the housing market.

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