December 30, 2011 / 12:55 PM / 7 years ago

HOW TO PLAY IT: Signs of life in the housing market

NEW YORK (Reuters) - Could the U.S. housing market finally be on the mend?

New residential homes are shown under construction in Carlsbad, California September 19, 2011. U.S. homebuilder sentiment dipped in September with an industry index mired in a low range as the housing market continues to struggle, the National Association of Home Builders said on Monday. REUTERS/Mike Blake (UNITED STATES - Tags: BUSINESS EMPLOYMENT POLITICS CONSTRUCTION REAL ESTATE)

Recent reports paint a mixed picture. In a sign of renewed demand, sales of existing homes hit a one-and-a-half year high in November. Still, home prices have fallen for 13 consecutive months and any recovery would come from a very low level.

In the past there have been false signs that the worst of the housing bust had passed, but if housing is finally improving, it could be a boon for investors. Here are targeted real estate plays for the new year.


Apartment buildings, rather than single-family homes, could remain the housing sector’s growth market in the next few years.

Builders are only now starting to address a large imbalance in the market. Construction of multi-family buildings lagged in the 2000s because easy financing turned many would-be renters into homeowners.

Cheaper labor costs and lower property values compared with 2006 and 2007 have convinced developers to begin work on apartment buildings, said Jacob Frydman, chief executive at United Realty Partners, a real estate advisory firm based in New York. Apartment building projects are up 60 percent in 2011 compared with last year. Single-family home starts, meanwhile, have fallen by 10 percent.

Trouble in the single-family home market will also lift the apartment business, noted Oliver Chang, an analyst at Morgan Stanley. Current homeowners who will soon go through a short-sale or foreclosure will most likely turn into renters, he said. Tight lending requirements by banks will mean that “households should move toward rentals in greater numbers than in the past” because fewer potential buyers can qualify for loans, he wrote in a recent note to clients.

Equity Residential and UDR are two of the largest publicly traded REITS that specialize in apartment buildings. EQR may be in a better position because of the quality of its assets, analysts said.

Holdings in the New York metropolitan region - a part of the country where housing has held up relatively well - make up EQR’s largest market with 13 percent of assets. Battered markets like California’s Inland Empire and Orlando, Florida constitute a much smaller portion of its portfolio than at rival UDR.

EQR is up 10 percent so far this year. It yields nearly 4 percent.

Funds are another option for investors who don’t want to wade through the holdings of individual trusts. The Vanguard REIT Index fund currently yields 3.4 percent. The index fund holds a variety of REITs not just those that focus

on apartment buildings. EQR makes up 5 percent of its total assets.

EQR makes up 8 percent of the assets of the Fidelity Real Estate Investment fund. The fund is up 7.8 percent in 2011, after dividends..

Richard Milligan, an analyst at Raymond James, said self-storage REITs should outperform the broader market again in 2012 as publicly-traded companies continue to take market share from smaller independent operators. He expects foreclosures and short sales to boost the rental industry as downsizing families decide to store excess furniture and belongings rather than sell them.

Public Storage, the largest self-storage REIT, is costly at 44 times earnings. But it could be a momentum play. Shares are up 33 percent in 2011 and hit a 52-week high on December 27.


Bad mortgages, along with the prospects of more to come, sunk financial companies in 2011. Foreclosures and short sales should remain steady for the first six months of 2012 as well.

Low share prices and hopes that the recent drop in the unemployment rate will lead to a real estate turnaround have some investors looking at financial stocks as a value play.

“The only double-digit return you’ll be able to get in 2012 will be in banks,” said Jamie Cox, managing partner at Harris Financial Group in Colonial Heights, Virginia. “Of course, it’s easier to say that now they’ve all fallen 30 percent. But nothing will make banking a more favorable place to invest than to have real estate improve.”

Cox, who owns shares of Bank of America and JP Morgan Chase & Co, is buying large banks because they are trading at low book values — the estimated worth of a company’s assets on its balance sheet. Bank of America, for instance, trades a price to book value of just 0.24 percent.

He’s staying away from regional banks like SunTrust and Zions Bancorp because their businesses are centered in areas like Arizona and Florida that were epicenters of the real estate bust, he said.

Value investors have ETF options as well. Large banks are the top holdings in the iShares Dow Jones US Financials, which has fallen 15 percent in 2011. Wells Fargo and JP Morgan each make up approximately 6.5 percent of assets.

Vanguard’s Financials ETF has similar holdings but includes residential REITs along with banks.

Reporting By David K. Randall; Editing by David Gaffen

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