Unprecedented demand and deflated supply — that’s the common explanation for the incredible housing boom that we’ve witnessed since the novel coronavirus pandemic. In many ways, the narrative makes logical sense. Over the trailing year, stocks to buy tied to the real estate market have blossomed as desperate buyers competed for what little inventory was out there, a condition driven by health concerns.
However, at a certain point, you’ve got to imagine that enough is enough: as prices rise, the economy risks imposing an affordability squeeze. Yes, historically low interest rates have reduced the cost of borrowing, which was one of the early catalysts for people diving into real estate. At the same time, data indicates that mortgage payments are nearing historically high unaffordability levels. That might hurt the case for stocks to buy in the housing segment.
Nevertheless, there’s an argument to be made for the housing boom continuing to soar or at least maintaining a high price threshold compared to the pre-pandemic era. For instance, the broad work-from-home initiative — which apparently white-collar employees universally love — has a consequence because of course it does (nothing occurs in a vacuum). Thanks to virtual operations, people can expand their choice of housing options, invariably driving demand for stocks to buy in the real estate sector.
Additionally, data from the Federal Reserve Bank of New York Liberty Street Economics indicates that home prices in urban areas have been growing slower than in suburban neighborhoods and rural communities. Therefore, authors Andrew Haughwout and Belicia Rodriguez argue that the current boom is “not simply repeating the housing market bubble of the early 2000s during the pandemic.” If so, we could potentially see a longer upside pathway for housing-related stocks to buy.
As well, mortgage lenders “have raised lending standards near continuously, and above the requirements of the 2010 Dodd-Frank Act.” Therefore, it’s possible that we’re conflating a housing bubble with is what’s actually a wealth gap issue. In other words, those who have means are still able to buy homes — they just have to stretch a little more. For such a scenario, the below stocks to buy might make sense.
- Redfin (NASDAQ:RDFN)
- Matterport (NASDAQ:MTTR)
- Essex Property Trust (NYSE:ESS)
- Camden Property Trust (NYSE:CPT)
- Home Depot (NYSE:HD)
- Lemonade (NYSE:LMND)
- Public Storage (NYSE:PSA)
For full disclosure, I’m personally not gung-ho on the idea of the real estate boom continuing. Therefore, you should be careful approaching these stocks to buy. At the same time, I don’t want to limit my discussion points only on sectors I’m bullish on. So if you have conviction in real estate, these ideas may work out for you.
Stocks to Buy: Redfin (RDFN)
Redfin started on the back of a simple but profound question — what if prospective homebuyers could leverage technology to save money and find better deals, similar to other retail sectors? What came about from that initial inquiry is a full-service real estate brokerage firm, one that undercut the competition through a superior business model.
Indeed, it’s possible that Redfin might be even better than advertised, which makes it a compelling case for stocks to buy, particularly as RDFN hasn’t performed that well on a year-to-date basis, down nearly 28%. Through easy home-touring processes to its money back program, Redfin appeals to every demographic as the competition for homes has been unrelenting.
Of course, the tech-based platform appeals strongly to millennials, which is perfect timing in a way for RDFN stock. Many folks in this demo are entering prime homebuying age. As well, this generation has largely grown up on digitalization, which makes selling the Redfin business model a viable conversion opportunity.
If you take a look at housing-specific stocks to buy, many of them have been underperforming the broader indices over the last several months — and by a fairly wide margin, I might add. One exception to the case is software technology platform Matterport.
Although not an exclusive service for the real estate market, Matterport has been absolutely essential in navigating the housing sector during the post-outbreak period. Signifying the standard for 3D space capture, the company’s platform allows prospective homebuyers to have a better representative image of their property of interest. Naturally, with Covid-19 cases going around, such tech enabled people to view — and make decisions — from afar.
Further, it’s not just real estate acquisitions where Matterport comes in handy. Several apartment complex managers use the service to give future tenants what their living conditions will really look like. A nifty idea in the pre-pandemic era, it became a must-have concept during the new normal.
Perhaps not surprisingly, then, MTTR has been one of the top stocks to buy over the trailing month, with shares up almost 40%.
Stocks to Buy: Essex Property Trust (ESS)
Speaking of apartments, direct real estate plays are not the only place where you’ll find viable stocks to buy if the housing boom continues its remarkable trajectory. Out of curiosity, I’ve been looking at apartment prices in my local area and I’m shocked at what I’m seeing. Given these insane rate jumps, it could be time to consider Essex Property Trust, a real-estate investment trust (REIT) in the apartment rental business.
And you don’t have to rely on my personal observations. As CNBC reported, “Housing costs were rising before Covid, but the coronavirus exacerbated the problem: The national median rent has increased by 11.4% so far in 2021, compared with just 3.3% for the first six months of 2017, 2018 and 2019, according to a report from Apartment List, a rental listing site. Average rent growth this year is outpacing pre-pandemic levels in 98 of the nation’s 100 largest cities.”
But the media outlet also indicates that rent could go up again. Part of the reason is stronger consumer confidence. After a year or so of lockdowns and other stifling restrictions, people are ready to resume their normal activities. That all bodes very well for Essex Property Trust, which has been a strong performer this year.
Camden Property Trust (CPT)
A significant portion of the bull case for stocks to buy in apartment REITs is the classic catalyst “location, location, location.” For instance, REITs tied to the west coast, particularly southern California as is the case for Essex above, will always enjoy robust demand.
For one thing, port cities are economically more important than landlocked regions — and California has several of the former. In addition, despite the many criticisms that the Golden State endures (high taxes, onerous regulations, widening wealth gap), it remains a top-tier international destination.
That said, many folks — and especially millennials — have had enough. To profit from this great generational migration that’s been fueled by the insane housing boom, you should consider adding Camden Property Trust to your portfolio.
Why Camden? Again, it’s all about location, location, location. Armed with multiple properties in happening areas such as Houston, Atlanta, Austin and Charlotte — to name but a few — Camden is basically sitting on a real estate gold mine. With more people migrating to these areas, the REIT is organically letting demand come to it.
Stocks to Buy: Home Depot (HD)
During the pandemic, Home Depot has been a lifesaver for me. At first, I wasn’t really in the mood to go shopping in person. Thankfully, the company had been investing in its online shipping unit leading up to the pandemic and it paid off tremendously (albeit cynically) when the crisis first struck.
True, consumers could get their needs served through other e-commerce platforms. But the beauty of Home Depot is its seamless integration between its online and offline businesses. For instance, if you have a problem with a product, you can return it to your local store instead of having to deal with return shipping.
Now that society has more or less acclimated to the public health crisis, HD could be one of the stocks to buy if you anticipate continued optimism in the housing market. After going through with what’s the biggest investment in most people’s lives, they’ll likely want to improve their new abode, auguring well for HD.
Also, renovation work may boost demand too as home sellers try to squeeze every last dollar from this historic rally.
In my line of work, you don’t see too many people clamoring to write about insurance stocks to buy, mainly because the topic is so boring. Don’t get me wrong — boring can be very appropriate, particularly in an uncertain economic environment like we’re in now. Still, the concept is a snoozer, that is until Lemonade came along.
Leveraging the power of technology, Lemonade is essentially the “Redfin of the insurance arena.” Rather than going through the time-intensive process of the traditional insurance route, Lemonade uses a propriety analytics software to quickly provide you with a reasonable quote. Also, the company covers a variety of coverage categories, such as renters, homeowners, term life and even pet insurance.
Obviously, if the housing boom continues, the homeowners segment for Lemonade should enjoy significant growth. Much of that centers on the similar thesis for Redfin — young people have grown up with technology so it only makes sense to serve this demo with convenient, digitalized solutions.
Also, the renters segment will be a lifeline for millennials, many of whom are giving up their homebuying aspirations for now.
Stocks to Buy: Public Storage (PSA)
If we’re talking about quitting, almost every institution out there — from military branches to weight-loss programs to mental healthcare centers — urges you to keep fighting the good fight. Unless you’re talking about bad habits, quitting doesn’t usually produce positive results. However, it might be the appropriate course of action for certain homebuyers.
Substantially overpaying for a home could have devastating consequences, especially for those who stretch their budgets to compete in this intense ecosystem. Primarily, you’re burdened with a higher monthly mortgage payment, a challenge that could intensify if the broader economy weakens. Secondly, if you buy at or near the top, you could end up being upside down on your mortgage should property values decline.
This all sets up a cynical argument for Public Storage. According to the New York Times, homebuyers who have been priced out of the housing boom have resorted to putting their belongings into storage facilities as they wait out a more opportune moment to pull the trigger.
Also, general uncertainty about how to handle the pandemic and its wider impact have left many people in a holding pattern. For stocks to buy in the storage industry, that sentiment has a literal connotation.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare.