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3 Real Estate Companies to Steer Clear of as Interest Rates Increase

On July 26, the Federal Reserve is expected to raise interest rates by 25 basis points (0.25%). While the announcement itself usually doesn’t have a significant impact on the market, the housing market may experience short-term demand destruction due to the rate hike. Here are three real estate companies that investors should steer clear of as interest rates increase:

1. Opendoor Technologies (NASDAQ: OPEN): Opendoor is an AI-driven real estate company that simplifies the buying and selling process. However, the stock has seen a 45% increase since mid-June, largely driven by artificial intelligence rather than the housing market. The concern here is that AI cannot change the impact of higher interest rates or alter the laws of supply and demand. While Opendoor has potential for the future, its present financial performance is unclear, with declining revenue and a lack of profitability.

2. Zillow Group (NASDAQ: ZG): Zillow is another real estate company that has an AI story behind its stock’s recent rally. However, like Opendoor, the stock’s rise is not driven by market dynamics but by artificial intelligence. Institutional investment in Zillow is low, and selling activity outweighs buying activity. With better investment options available, investors should be cautious about investing in Zillow at this time.

3. D.R. Horton (NYSE: DHI): D.R. Horton is a homebuilder whose stock has been on the rise after the Federal Reserve announced a pause in interest rate hikes. The company’s quarterly earnings report showed strong revenue growth. However, this may be a temporary break from the overall downward trend. Housing starts in June were weaker than expected, and there may be further rate hikes before the year’s end. The current earnings report also showed a year-over-year decline. While D.R. Horton may be worth keeping an eye on as a leading indicator of a housing market recovery, it is not a recommended investment at this time.

These three real estate companies may thrive in the future when the housing market recovers, but for now, they are best suited for long-term investors who can wait for a recovery. It’s important to consider the potential risks and uncertainties associated with higher interest rates before making any investment decisions in the real estate sector.

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