Slowing Home Sales Is Great For These Two Stocks

| June 7, 2022
Slowing Home Sales

The pace of existing and new home sales has started to slow dramatically. Sales of existing homes fell 2.4% for April compared to March, and were down 5.9% to a year earlier.

New home sales fell even harder, with April sales off 16.6% compared to March, and down 26.9% year-over-year. Rising mortgage rates thanks to the Fed should continue the trend.

The conclusion is that if people are not buying homes, many will continue to rent. Despite this logic, share prices of residential REITs have fallen with the rest of the market.

That’s why now may be a good time to invest in real estate – and here are my favorite stocks to do that with…

Higher mortgage rates are making a home purchase less affordable. Thirty-year mortgage rates now average more than 5%, up from around 3% a year ago. On a $300,000 mortgage, the higher rate adds $400 to the monthly payment.

Put another way, the principal and interest amount increase by 33% for a 5.25% loan, compared to a 3.0% loan. Ouch!

The higher payments knock a lot of potential first-time buyers out of the market. These out-of-luck folks still have to live somewhere, and they will continue to rent apartments or single-family homes.

Residential/apartment REITs are a great way to get investment exposure to rental properties and rising rental rates. Yet, apartment REIT share prices have tumbled with the rest of the stock market. For example, one of my recommendations, Apartment Income REIT Corp (AIRC), is down 17.5% year-to-date.

A new fund, the Home Appreciation U.S. REIT ETF (HAUS), provides investment exposure to the four categories of residential housing:

  • Apartment REITs
  • Single-family rental (SFR) REITs
  • Senior living REITs
  • Mobile home park REITs (yes, there are three of them with outstanding track records)

I like the fund because these REITs all operate as leasing companies of rental properties. They are not affected by higher mortgage rates. Higher rates and lower home affordability allow them to raise their tenants’ rents. The result will be growing income, funds from operations (FFO), and dividends from these REITs.

An interesting anecdote comes from Starwood Property Trust (STWD). Starwood owns about 60,000 rent-controlled apartments in Florida. The State of Florida sets rental rates based on lower-income wages. With wages going up so fast, the rents STWD earns are growing at a double-digit rate.

Investments like AIRC and HAUS could easily put up near double-digit dividend growth.

This article originally appeared at Investors Alley.

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Category: Real Estate

About the Author ()

Tim Plaehn is the lead investment research analyst for income and dividend investing at Investors Alley. He is the editor for The Dividend Hunter, an investment advisory delivering income investments with double digit growth in share price and dividend payments. Tim’s also editor of Weekly Income Accelerator, a covered call trading service, and Automatic Income Machine, a dividend growth service focused on growing your nest egg.

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