by Jason Jenkins, Investment U Research
Tuesday, November 22, 2011
News flash: The residential housing market is a mess. As I wrote in the past, declining values, weak sales, high inventories and legal problems with foreclosures have turned many people off to buying a home. It’s one of the major problems the Executive Office and the Federal Reserve are presently attempting to tackle as the housing market is seen as a direct stimulus to economic recovery.
But here’s something you probably wouldn’t expect: As a group, U.S. REITs have gained about 170 percent from the lows of two years ago. Up north, Canadian REITs have risen more than 120 percent – and both of these totals are excluding dividend payments.
REITs are still well off their 2007 highs, despite their strong gains since 2009. Canadian REITs, as represented by the S&P/TSX REIT Index, are down 18 percent from that high. U.S. REITS, as represented by the MSCI REIT Index, are off 36 percent.
What can be implied is that prices haven’t factored in a full recovery, allowing room for economic missteps. REITs can be seen as the perfect vehicle for waiting out a bear market because they look especially attractive with their dividends.
What’s Driving REIT Activity
Multifamily REITs – and let’s not forget ETFs – are at the forefront. The demand for rentals is growing so strongly that Realtor.com, the largest real estate website, is planning on listing apartments on its site for the very first time.
The Census Bureau tells us that demand for rentals remained high in the second quarter of this year, while homeownership rates declined slightly 65 percent. The national apartment vacancy rate dropped to 9.2 percent. That’s a one-year decline of 1.4 percent.
And there are two reasons to expect demand for rentals to continue to increase:
1. The ongoing trend of families losing their homes to foreclosure will continue to drive up the demand for rentals.
2. A new generation of households that lack down payments, sufficient credit scores, or the courage to buy a home in the face of declining prices will continue to create demand for rentals.
Maybe investors have their heads in the sand but homebuilders haven’t. In June of this year, the number of multifamily home starts with at least two units surged over 30 percent from the previous month.
Similar results were reported in October by the National Multi Housing Council’s (NMHC) latest Quarterly Survey of Apartment Market Conditions. The NMCH reported that 67 percent of the developers it surveyed said they either broke new ground or engaged in ongoing construction of multifamily units.
Better Than U.S. Treasuries
Dividend yields for REITs are trading well above U.S. Treasury yields right now.
Presently, U.S. REITs yield about 3.7 percent, which is decidedly more than the two percent you hope to get on the 10-year. And also, Canadian REITs are yielding around the neighborhood of about 5.6 percent, which is well above the yield on the 10-year Government of Canada bond.
One way to gain exposure to a quality REITs is the Vanguard REIT Index Fund (VGSIX).
Among REIT funds, Morningstar says this fund is “one of the cheapest, no-fuss ways to add sector exposure to your portfolio.” The fund has returned 11 percent over the past decade, and holds each of its stocks in approximately the same proportion as the weighting in the MSCI U.S. REIT Index.