Although prices and interest rates are great, the duo have failed to propel the real estate market during the past two years. There is a deep sense of fear among renters in the 21-to-39-year-old demographic that prices will continue to fall and that home ownership is a bad deal. All they’ve seen since 2006 is price depreciation and massive foreclosures, and that has shaped their world view.
Plus, today’s apartment complexes and rental condos offer enticing packages of workout rooms, in-ground pools, tennis courts, lakes and walking trails. These features are very alluring to Millennials, even if they are paying higher rents to get them. Many do not want to give up these perks, nor do they long to own a lawnmower or snow shovel. Having seen their parents struggle, they no longer share the dream of home ownership that previous generations had.
A View From the Inside
Talk with mortgage and real estate industry insiders, as I do on a regular basis, and you will get a much different perspective of the market. The Dodd-Frank Act has created a nightmare of regulation in the mortgage industry, and has put many of the smaller companies out of business.
The journey from contract to closing continues to be difficult, with a high percentage of deals never closing escrow. More than a third of all real estate closings continue to be investors buying lower-priced foreclosures. The recent reports of lower inventory do not include the next wave of foreclosures, which will be released over the next 12 to 18 months, following the settlement between the 50 attorneys general and the five largest banks.
What Should Investors Do Now?
My advice is to avoid most housing-related stocks for a while longer. Homebuilder stocks are pulling back, and should not be bought until their correction runs its course. Home Depot (NYSE:HD) had a good earnings report last Tuesday, but the stock failed to rally the rest of the week. Home Depot also seems very overextended after running up from $31 in October to its current price around $47.
However, one investment that looks better is the iShares FTSE NAREIT Residential Plus Capped Index Fund (NYSE:REZ). This is an exchange-traded fund of real estate investment trusts that invest in apartment buildings.
Click to EnlargeREZ recently pulled back from $46.70 to Friday’s close at $44.90 and is sitting on support at the 50-day moving average. REZ also sports a 3% dividend yield, and its total return in the past 52 weeks has been 17.42%.
Apartment occupancy rates are extremely high right now, and even if employment numbers improve, most of the Millennials who leave their parents’ homes will move into apartments, rather than buying homes.
So spring might be blooming, but the picture for housing-related stocks doesn’t look as rosy as recent reports suggest. For now, investors might be wise to look for other sectors with better-looking blooms.
As of this writing, Ethan Roberts did not hold a position in any of the aforementioned securities.