After falling for seven consecutive months, the US national Case-Shiller home price index finally showed gains in February and March. But according to economic research firm Capital Economics, the decline in the housing market is far from over.
In their latest report, researchers from Capital Economics point out that the rise in house prices in February and March was due to higher demand resulting from lower mortgage rates earlier this year. But that will prove to be short-lived.
“Rates have since returned to near two-decade highs set in October, sending demand down to its lowest level in nearly 30 years,” the report said.
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Economists suggest that due to high mortgage rates and a weakening economy, house prices will start falling again later this year.
“We expect the capital value of apartments to plunge another 20% in 2023 and 2024, resulting in a peak-to-trough drop of around 25%.”
It’s a scary picture. But not everyone shares the same vision.
“A big beneficiary on the way to the exit”
Billionaire investor Stanley Druckenmiller recently said that housing “obviously fell dramatically given the 500 basis point rise in interest rates.”
But that’s not catastrophic, as the investment legend noted that there is now a “structural shortage of single-family homes.”
“So if things got bad enough, I could actually see that housing — which is pretty much the last thing you would intuitively think about — could be a big beneficiary on the way out,” Druckenmiller said. .
The reality is that no matter what, people will always need a place to live. Meanwhile, high mortgage rates mean it’s less possible to own a home. And when people can’t afford a home, renting becomes the only option. This creates a stable rental income stream for landlords.
But you don’t have to buy a house to start earning rental income.
Be greedy when others are afraid
Publicly traded real estate investment trusts (REITs) own income-generating properties and pay dividends to shareholders. As the housing market faces uncertainty, Wall Street still sees a big upside in these residential REITs.
Mid-America Apartment Communities Inc. (NYSE: MAA): Mid-America Apartment Communities is a REIT primarily focused on apartment communities in the high growth Sun Belt region of the United States. At the end of the first quarter, it held an interest in 101,986 apartments, including communities under development. With a quarterly dividend rate of $1.40 per share, the REIT offers an annual yield of 3.6%. Goldman Sachs analyst Chandni Luthra has a buy rating on Mid-America and a price target of $180. Given that the shares are trading today at $153.25, the price target implies a potential upside of 17%.
AvalonBay Communities Inc. (NYSE: AVB): AvalonBay Communities is an apartment REIT that focuses on metropolitan areas in regions it believes are characterized by job growth in high-wage sectors and lower housing affordability. These regions include New England, New York/New Jersey Metropolitan Area, Mid-Atlantic, Pacific Northwest, and Northern and Southern California. The stock has jumped 17% since the start of the year and Truist Securities analyst Michael Lewis sees more potential on the horizon. The analyst has a buy rating on AvalonBay and a price target of $211, about 11% above the stock’s current position. AvalonBay offers an annual dividend yield of 3.5%.
Camden Estate Trust (NYSE:CPT): Camden Property Trust owns, manages, develops and acquires multi-family apartment communities. As of April 30, its portfolio consisted of 172 properties totaling 58,702 apartments. The REIT pays quarterly dividends of $1 per share, which translates to an annual return of 3.6%. Barclays analyst Anthony Powell has an overweight rating on Camden and a price target of $137, implying a potential upside of 22%.
Income investors are attracted to REITs because they are some of the best performing names in the stock market. But remember that publicly traded REITs, including those that focus on apartment buildings, are always subject to the ups and downs of the stock market. If you don’t like the volatility associated with publicly traded REITs, there are options to invest in rental properties with as little as $100 on the private market.
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This article U.S. Apartment Values “Will Plunge Another 20%,” Economists Say, But Wall Street Still Sees a Major Upside in These REITs – Get Greedy When Others Fear? originally appeared on Benzinga.com
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