Where to Make Money in Housing

For years now, the housing slump has surprised both economists and investors with its persistence and the depth of price declines. Time after time, analysts have called bottoms in the housing market, only to see further weakness.

But one fundamental fact holds true no matter what home prices do: People have to live somewhere. Rather than trying to guess when that elusive low point in housing may finally come, you might well do far better taking a look at a trend that's booming right now.

Below, I'll talk about some ways to invest in the hot part of the housing market. But first, let's take a deeper look behind some recent headlines to try to pinpoint the trends you can profit from.

Renting the American dream
Yesterday, the Commerce Department released data that showed that housing starts fell in February by about 1% compared to the previous month. The markets took this headline as cause for concern that some recent strength in the housing market might have been overstated.

But a closer look at the numbers reveals a much more interesting trend. Single-family homes, which tend to be homes that people purchase rather than rent, saw a drop of nearly 10%. But multi-family buildings, which tend to be rental properties, saw a big boom of more than 20% from the previous month. Longer-term, multi-family starts have doubled in the past year.

The trend toward rental properties reflects the increased demand among residents to rent rather than buy. With so many former and would-be homeowners still reeling from the devastation in home prices in recent years, far fewer people are willing to take on the risk of further losses. In addition, a demographic boom among young adults, who are traditionally the target audience for rental properties, as well as continued immigration from abroad are further supporting the rental market over home ownership.

Where the business is
When the housing market was strong, it was obvious where to look to invest. Companies that build homes clearly profited when the market for those homes was taking off. Since the housing bust, those stocks have largely collapsed after seeing volatile movements from repeated overly optimistic forecasts about housing that turned out to be false -- or at least premature. For instance, both Hovnanian (NYS: HOV) and Standard Pacific (NYS: SPF) have seen their stocks make huge moves upward since last fall, as boosts in backlogs and orders have investors getting enthusiastic about their prospects again. Yet they're still well below their 2010 highs -- let alone their much higher levels during the housing boom.

By contrast, apartment REITs are capitalizing on the popularity of renting. More than a year ago, REIT expert Ralph Block pegged Avalon Bay Communities (NYS: AVB) as a strong apartment developer on both coasts with a solid balance sheet. In the past year, the shares have risen almost 20%. Similarly, Chicago-based Equity Residential (NYS: EQR) has properties from California to Florida and New England.

If location is important, you can also find smaller, more focused apartment REITs. BRE Properties (NYS: BRE) , for instance, concentrates on California's coastal markets as well as Seattle. If you think particular markets have better promise than others, you can probably find a REIT that covers that area.

Get paid!
Best of all, apartment REITs have something that nearly all homebuilder stocks don't right now: dividends. With yields typically in the 2% to 3% range, payouts are somewhat stingy at the moment. But getting paid while also having the prospect of capital appreciation is a great combination -- especially for investors who've suffered through the housing bust.

If you're tired of trying to pick the bottom in housing, take a close look at apartment REITs instead. If the trend away from home ownership toward renting is a lasting one, then it could be a lucrative play for years to come.

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At the time thisarticle was published Fool contributor Dan Caplinger bucked the rental trend five years ago and never looked back. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended writing naked calls on Standard Pacific. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy neither booms nor busts.

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