Residential REITs Are Profiting From Falling Home Values

| May 10, 2011 | 0 Comments

Lookout… US home values are double dipping.

According to data just released by property value estimator Zillow.com, home values are falling at their fastest pace since 2008.  And prices may not hit rock bottom until 2012… at the earliest.

Zillow’s Home Value Index fell 3% in the first quarter.  And it’s even worse when you look at the year over year change.  Home values plunged 8.2% in the last twelve months.

I know it sounds bad… but a picture’s worth a thousand words!

Clearly, the downward spiral from the peak in June of 2006 hasn’t stopped.  In fact, the decline is accelerating since the government stopped giving away $8,000 tax breaks to buy a home.

That’s the last thing homeowners want to hear.

And here’s the scariest part…

More homeowners than ever owe more on their mortgage than the house is worth.  Zillow estimates over 28% of all homeowners are now underwater.  And these underwater homeowners pose a huge threat to home prices.

Right here in Phoenix the dream of homeownership has turned into a nightmare.  A startling 68% of homes with a mortgage are now underwater.

Even homeowners who played it safe are in deep trouble.  Anyone placing a 20% down payment to buy an average cookie cutter track home between February 2004 and May of 2009 is underwater.

Sadly, I know far too many people who are in this boat.

Here’s what bothers me the most.  Even though these people didn’t cause the housing bubble or the crash, they’re the ones paying for it.

Many underwater homeowners are facing a cruel reality.  They can continue throwing money away on a losing investment, or they can stop the bleeding and walk away.

To be perfectly honest, the best option for many of these homeowners is to walk away.  They can try to get their lender to accept less than they’re owed in a short sale.  But if that doesn’t work, they’ll just have to let them foreclose.

One thing’s for sure… there are going to be more people who either choose to or are forced to rent instead of own a home.

This dynamic creates an interesting and potentially very profitable investment opportunity.  Let me explain…

The hardest hit real estate markets have a number of great properties selling at cheap prices.  And they have a growing pool of former homeowners who will be renting homes for at least three to five years. (That’s typically how long it takes before banks will lend money to someone who has had a foreclosure or short sale.)

The smart money knows this is a great buying opportunity.  It’s why record numbers of real estate transactions are cash purchases.  In January, more than 30% of all homes sold in California were cash buyers.

Simply put, residential real estate is the hated investment smart money is pouring billions of dollars into right now.

How do you know it’s a great opportunity?  Because, nobody’s talking about it yet…

Here’s the worst part… Most investors don’t have enough money to take advantage of this great buying opportunity.  Or they don’t want to deal with owning real estate or being a landlord.

The good news is… You can still profit from real estate without owning it directly.  The easiest way for you to profit from plunging home values is by investing in residential REITs.

Residential REITs (Real Estate Investment Trusts) specialize in owning multifamily apartment buildings.  They’re benefiting from the influx of former owners who are now renting.

And that’s not all…

The number of new apartment buildings being built or planned came to a virtual standstill during the credit crisis.  Now demand for apartments is outpacing supply in many parts of the country.

And it’s not like they can just bring new supply online in the blink of an eye.  It usually takes three to five years from planning to completion of a new apartment complex.

In other words, demand for apartments is going up…

But new supply is years away.

As a result, rents are expected to increase at better than 7% annually for the next few years.  That’s great news for REITs specializing in multifamily housing.  The more money REITs can charge for rent, the more profitable they are.

One ETF set to profit from rising rents is the iShares FTSE NAREIT Residential Plus Capped Index Fund (REZ).

REZ holds 36 residential REITs.  The REITs specialize primarily in multi-family housing, long-term care facilities, and self-storage complexes.  And it pays a healthy 3.11% dividend yield.

I’m sure you’ll agree that plunging home values are bad for homeowners. But REITs specializing in residential real estate don’t share the same fate. Take a look at REZ for your portfolio today.

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Category: Real Estate

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets on a daily basis. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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