Mortgage rates last week climbed to their highest levels since the beginning of the year on elevated economic risks. With markets still hopeful of at least one interest rate cut in the second half, the real estate sector stands poised to bounce back in a lower rate environment.
While mortgage rates climbed ever higher in May, applications proved resilient, up 18% compared to the same time period last year, reported CNBC. However, refinance applications fell week-over-week as consumers grappled with heightened uncertainty and the current reality of elevated rates. The Fed continues to hold rates steady while monitoring labor market health and watching for tariff impacts.
Tariffs remain the great unknown, with their potential for broad economic and inflationary impacts. Should inflation rise and consumer demand fall, economic slowing would in-turn lead to weakening in the job market. It’s a domino effect that would spurn the Fed into action, cutting rates to attempt to bolster the labor market.
Interest rate cuts would bring relief for homebuyers and the real estate sector broadly. Declining rates create a more favorable environment for financing, driving increased demand across real estate sectors. The CME Group FedWatch Tool currently puts market estimates for a quarter point interest rate cut at 48% for the September FOMC meeting.
For those investors wanting to harness the potential of the sector while earning income, the NEOS Real Estate High Income ETF (IYRI) is worth consideration. The fund boasts a distribution rate of 11.86% as of April 30, 2025. Distribution rate is a forward-looking measure that annualizes the most recent distribution and then divides by the fund’s NAV. It’s what an investor would earn over the course of a year should distributions remain the same.
