Saturday, December 29, 2012

How to Play the Real Estate Recovery

First there is the anecdotal evidence. I know of a Sacramento couple that has put offers on eight homes in the last three months, all above the asking price, and getting outbid on all of them, mostly by all cash buyers according to their real estate agent. I have a friend who recently sold his house in Pleasanton, California, who received several all-cash offers way above the asking price, and closed escrow in thirty days. A house in my neighborhood sold within six hours of listing.

Now the statistical evidence. According to the Standard & Poor's/Case-Shiller Home Price Index, which is the leading measure of U.S. home prices, home prices rose 4.3% in the 12 months ending in October. The fact that home prices is good, though you may think that 4.3% isn't that much. However, what many analysts fail to take into account is that most people (although recently that seems to be changing) do not pay all cash for a house. They generally put 10% to 20% down.

What that means is that if you had purchased a home last year with a 20% down payment, and the home price rose by 20%, the return on the down payment would actually be 21.5%, in simple terms. This of course assumes all other things being equal, i.e. the mortgage, taxes, insurance, etc. being covered by rental income or an alternative to paying rent if living in the house.

If the down payment is only 10% with the same assumptions, the return would be double that. And if you have owned your house for a few years and lost all your equity, your gain during the last year would be infinite.

The reasons for these real estate gains are several. First, the Federal government has kept mortgages artificially low, making it easier for home buyers to qualify. Second, there have been an influx of foreign buyers willing and able to pay all cash for homes. Third, because of the cutback in the building of new houses, the inventory of available homes for sale has been constricted. Fourth, real estate has been extremely depressed for a few years, with a bounceback being inevitable.

So what is an investor to do who wants to play the single family home real estate market without having to buy a rental house? Most of the residential real estate investment trusts, such as Aimco (AIV), AvalonBay Communities (AVB), and Home Properties (HME), invest in apartment houses. To invest in single family homes, you have to dig further.

Silver Bay Realty Trust (SBY) owns a portfolio of over 3,100 single-family residential properties through entities associated with Two Harbors Investment Corp. (TWO), and Provident Real Estate Advisors LLC. The company just went public in mid-December with 13.25 million shares in the IPO at $18.50 per share. Several officers and directors purchased the stock. Although falling about 2% after the IPO, the stock is now up 14 cents from its new offering price.

Then there are the homebuilder stocks, but most of those have already had a substantial move this year. PulteGroup (PHM) is already up 179% this year, KB Home (KBH) is up 128%, and Lennar (LEN) is up 89%.

Last but not least, the real estate brokers are doing quite well. The biggest pure play in this arena is Realogy Holdings Corp. (RLGY), which franchises the Century 21, Coldwell Banker, ERA, Sotheby’s International Realty, Coldwell Banker Commercial, and Better Homes and Gardens Real Estate brand names. The stock trades at 33 times forward earnings, and posted a quarterly revenue increase of 10.9% year-over-year with negative earnings.

If you think that real estate is on the move in all areas (apartments, commercial, industrial, etc.), you can access the free lists of REITs with High Yields and Residential REITs with High Yields at

Disclosure: Author owns SBY and has a long option position in RLGY.


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