The strong housing market has been a catalyst for housing stocks. And it appears this rally has legs.
You only need a basic understanding of economics to know that there is inflation in the economy. Yes, the core Consumer Price Index (CPI) came in lower than expected in September. But for many households and small businesses that’s cold comfort. If you buy gas and food, you know that inflation has been here for quite some time.
You also knew that inflation was alive and well if you’ve been looking for a home or if you’ve been building a home. From lumber prices in 2020 to the dwindling supply of new homes in 2021, prices have been rising. And the housing market is expected to remain hot in 2022.
There are many ways to invest in housing stocks. You can look at homebuilders and companies that supply building materials. Investors can also look at real estate stocks. Companies in these sectors have seen its stock perform well at different times in this strong housing market.
A tried-and-true way to keep your portfolio ahead of inflation is to buy dividend stocks. Fortunately the housing sector gives you several quality stocks to choose from. Among this group are real estate investment trusts (REITs) that are required to pay out a significant portion of their earnings as dividends.
With that in mind, here are seven housing stocks that should give investors of all stripes an opportunity to stay ahead of inflation.
- Home Depot (NYSE:HD)
- Lennar Corp (NYSE:LEN)
- NVR (NYSE:NVR)
- AvalonBay Communities (NYSE:AVB)
- Essex Property Trust (NYSE:ESS)
- American Campus Communities (NYSE:ACC)
- Opendoor Technologies (NASDAQ:OPEN)
Housing Stocks for Inflation: Home Depot (HD)
The first of the housing stocks on this list is Home Depot. The company was one of the big winners during the pandemic as homeowners focused on home improvement projects. Some investors may have gotten spooked as the economy began to reopen. If you were a shareholder, I hope you didn’t sell.
That’s because while consumers may have slowed their purchases, professional builders have picked up the baton. And that’s a big reason why HD stock is up 32% in 2021. At this point, the stock is bumping up against the consensus view of analysts. However, what investors should focus on is revenue and earnings.
Unlike other retailers, Home Depot has a high bar to clear in terms of year-over-year comparisons. So far, the company is doing very well. In the company’s second quarter earnings report, the company posted an 8% year-over-year increase in revenue and an 11% increase in earnings.
Lennar Corp (LEN)
We move from the nation’s number one housing stock to the nation’s leading home builder. That’s what makes Lennar Corp the second of the housing stocks to buy. The bullish thesis is easy enough to understand. The supply of new homes is diminishing. That means new homes will have to be built. Lennar is all too happy to meet that demand. And like anything in real estate, location is everything.
Lennar builds many homes in the booming Sunbelt region. Not just that, but in the last quarter, Lennar announced that it was getting a 25% margin on its $400,000 average selling price.
Strong demand has filtered down to the company’s bottom line. In the last quarter, the company delivered earnings that were 38% higher than analysts’ expectations.
LEN stock is up 34% in 2021, yet is still trading below its 52-week high of around $110. That’s right about where analysts project the stock will go to in the next 12 months, so this is an opportune time to buy the dip.
Housing Stocks for Inflation: NVR (NVR)
NVR is a homebuilder that does things a different way. Rather than purchasing a large plot of land and assuming all the downside risk of developing it, NVR takes a different approach. I’ll let fellow InvestorPlace contributor Ian Bezek explain it:
“NVR, by contrast, pays landowners a deposit of up to 10% of the value of a lot and then has the right to buy the lot at a set price for a certain amount of time. If NVR doesn’t want the land anymore, they lose their deposit, giving the landowner a significant payoff. And if conditions remain favorable, NVR exercises the lot option and proceeds toward building a home there.”
Some people may get scared off by the NVR stock price. However, again I’ll turn to Bezek, who points out that the ability of investors to buy fractional shares of the stock may be giving the stock attention from retail investors.
AvalonBay Communities (AVB)
The first two stocks on this list focused on the housing sector. AvalonBay Communities is widely considered one of the best REITs to own in the premium apartment complex space.
The bullish case for AVB stock is simply a math problem. There are some would-be home buyers that will be priced out of the current housing market. That means they’ll be looking for spaces to rent. And they’ll be doing so right as rents are likely to go up to keep up with increasing demand.
AVB stock is up 44% for the year and the stock has just recently caught up to its pre-pandemic level. Currently, the stock is trading above the consensus price target of analysts. But this is one time where you have to look at recent analyst opinions. When you do you’ll see that many analysts are boosting their price targets and those targets put the stock well above the consensus estimates.
Housing Stocks for Inflation: Essex Property Trust (ESS)
Like AvalonBay Communities, if you’re going to get excited about Essex Property Trust, you have to look at the recent opinion of analysts. That’s because ESS stock is bumping up against its 52-week high and has recently crossed over its pre-pandemic highs.
But in the last 30 days, the company has received two analyst upgrades with price targets that are well above the current stock price. As Tezcan Gecgil points out, the key for this REIT’s growth will be an economic recovery on the west coast, particularly in California where the company has two of its largest markets (San Francisco and Los Angeles).
I’ll leave you to your own opinion about whether that will happen. However, if you look at the company’s track record, you’ll see that in the last five years share price growth (9%) has been growing faster than earnings growth (7.5%). And it seems that analysts expect that growth to continue.
American Campus Communities (ACC)
To be fair, I might not have paid close attention to American Campus Communities if I didn’t just move one of my children into his campus apartment. I can’t say that it was an ACC property, but it reinforces what makes ACC a quality housing stock to buy.
American Campus Communities is a REIT that focuses on campus communities. Today, off-campus housing has become a mini version of home. Many apartments feature modern kitchens, private bedrooms with en suites, and furnished common areas.
It’s truly a different world to someone who went to college (ahem) several years ago and a preference for students and parents who worry about their safety.
ACC stock took a beating at the onset of the pandemic as many colleges and universities moved to full-time remote learning. However, the stock is getting bullish attention from analysts. Earnings estimates for the current quarter are up three cents to 38 cents per share. And the earnings forecast for the entire year moved from $1.99 to $2.08. Combined with a dividend that comes out to $1.88 per year and you have a housing stock that’s worth a closer look.
Housing Stocks for Inflation: Opendoor Technologies (OPEN)
There is no shortage of opinions in regard to OPEN stock among InvestorPlace writers. And you can get both bullish and bearish arguments. In this article, I’m looking at housing stocks that will benefit from inflation and that’s why Opendoor Technologies gets a nod.
As Dana Blankenhorn outlined very well, normally technology helps drive prices down. The model of Opendoor counts on the idea that home prices will continue to rise (i.e. inflation). While the housing market is notoriously cyclical, there’s something to be said to riding the hot hand.
OPEN stock went public in 2020 and like many stocks got caught up in the meme stock movement. That’s not the company’s fault. But it does mean that the stock is still in the price discovery phase. Analysts give the stock a price target of $32.67 that would be a 28% gain from its current price.
Any cooling in the housing market will be detrimental to OPEN stock. And there are threats to the housing market. Add to those concerns that the stock still has high short interest, and this is not a stock for the faint of heart. But risk-tolerant investors may want to consider a position particularly if the stock price dips below $20.
On the date of publication, Chris Markoch 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.
Chris Markoch is a freelance financial copywriter who has been covering the market for seven years. He has been writing for InvestorPlace since 2019.