We recently compiled a list titled Real Estate Investing For Beginners: 11 Best Stocks To Buy. In this article, we will look at where Costar Group, Inc. (NASDAQ:CSGP) 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).

Costar Group, Inc. (NASDAQ:CSGP)

Number of Hedge Fund Holders: 42

Costar Group, Inc. (NASDAQ:CSGP) operates as a global provider of commercial and residential real estate information, analytics, and online marketplaces. The company strives on a mission to digitize the world’s real estate. To provide solutions across the real estate landscape, the firm has multiple brands including CoStar, LoopNet, Ten-X, Apartments.com, Homes.com, STR, BizBuySell, CoStar Real Estate Manager, Land.com, Thomas Daily, OnTheMarket, Business Immo, Belbex, Grecam, and BureauxLocauX.

CoStar has built the aforementioned international network of over 27 internationally recognized brands through strategic acquisitions and consistent, organic growth. This network of brands is robust as it attracts more than 100 million unique monthly visitors. The firm’s financial model remains strong with more than 95% of subscription revenue and 90% renewal rates for contracts with 1 year or longer terms. The growth potential is also long-term since CoStar Group has an addressable market for global real estate information and marketplaces of more than $100 billion.

During the second quarter, the firm recorded revenue of $678 million, up 12% year-over-year. The individual businesses also showed a strong performance. Apartments.com grew revenue by 18% and CoStar by 10%, since the prior-year period. CoStar Group hit the milestone of a record 183 million monthly average unique visitors. The commercial information and marketplace businesses delivered 41% profit margins in the quarter.

The firm’s competitive edge in commercial real estate and the substantial growth that lies ahead of it make it an attractive choice for investors. The stock was held by 42 hedge funds, as of 2024’s second quarter thereby ranking on our list.

Overall CSGP ranks 8th on our list of the best real estate stocks to buy for beginners. While we acknowledge the potential of CSGP 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 CSGP 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.