Major real estate stocks took a beating this week on concern that rising costs for everything from raw materials to the price of a hotel room could lead to higher interest rates, cutting consumer demand.
A Standard & Poor’s index of homebuilder stocks dropped 4.4 percent for the week, while Lennar, the biggest U.S. homebuilder, dropped almost 8 percent.
Soaring demand for homes during the pandemic had builders working at a furious pace, with housing starts up 20 percent from a year ago and the homebuilder index up 110 percent.
“Double-digit inflation in home prices may freeze first-time buyers out of the market,” said Mike Fratantoni, chief economist of the Mortgage Bankers Association.
Rising inflation could also prompt the U.S. Federal Reserve to raise benchmark interest rates. That would increase the cost of home mortgages and dampen demand in many sectors of the economy.
Prices of consumer goods are 1.4 percent higher now than at the start of March, having risen 4.2 percent in the last 12 months — the largest one-year increase since 2008, according to the Bureau of Labor Statistics.
So far, the Fed has held off on raising rates as the Biden administration pushes multi-trillion dollar stimulus packages to pull the country out of the pandemic-driven downturn. Still, inflation concerns eased a bit on Friday, with some real estate stocks rebounding. The homebuilders’ index rose 1.4 percent on Friday, while the broader S&P 500 rose 1.5 percent.
“I agree with the Fed,” said Fratantoni. “Inflation is likely to be transitory” as the economy comes back to life, “although price spikes may last longer than the word ‘transitory’ suggests.”
The demand for new housing has sent lumber and steel prices on an upward trend, with homebuilders passing the cost on to buyers.
Wage inflation could also add to inflation concerns. As businesses reopen, they are hiring to prepare for pent-up demand, and in some cases raising wages. McDonalds, for example, announced today it would raise wages for its U.S. workers.
The cost of staying in a hotel room rose 8.8 percent during the last two months, according to government figures. Hilton Worldwide Holding eked out a positive week with a gain of 0.17 percent to close Friday at $123.61 per share.
“Consumer confidence in early May tumbled due to higher inflation,” according to Richard Curtain of the University of Michigan’s index of consumer sentiment. “Rising inflation also meant that real income expectations were the weakest in five years.”
That was unwelcome news for retail real estate. Shares in Simon Property Group, the nation’s largest shopping mall owner, fell 2 percent this week to $122.27.
The outlook also remains uncertain for office landlords after a year of working from home.
New York office REIT SL Green fell nearly 2.5 percent this week, with investors valuing the company 26 percent below its pre-pandemic high of $98.68.
Zillow Group fell 5.5 percent, Airbnb fell 6.6 percent after it announced quarterly losses of $1 billion, and CoStar Group closed Friday down nearly 3 percent at $821.90 per share.