3 Reasons It Could Be the Best or Worst Time for Housing
The housing story, by now, is old news. Two years ago, analysts were putting out reports that housing starts were at record lows and that, by logical measures and plain common sense, we were likely entering a housing boom. Whether you heeded the advice or not, it's clear that these reports were spot-on, if underplaying the start-and-stop nature of the industry. While the past is full of "I should have" and "if only," the only thing that matters is what you do now. There's still profit to be made from the housing market. Here are three facts that prove it.
1. Housing starts
Housing starts refers to, if you can imagine, the number of new homes being constructed in any given period of time. It's one of the key indicators of not only the housing industry, but also the health of the economy as a whole. Two years ago, there were reports that new housing starts were at 40-year lows, with some saying they were the lowest since we began keeping track.
That isn't the case anymore, but get this: Housing starts in February were up 27.7% from the prior year, according to Calculated Risk. While that is a substantial increase, the figure still puts us way below the historical 1.5 million (average from 1950-2000) and indicates a potential increase of 60% from February's 977,000.
2. Multi-family matter
Multi-family housing has shown the greatest growth of any segment, but some analysts and pundits are worried that regulators will nix the Low Income Housing Tax Credit -- a crucial federal program that helps lower families' rent burden by enabling developers to undergo projects that would be unprofitable without the credits. This regulatory risk is a possible reason that multi-family REITs haven't performed in line with the housing industry as a whole. REIT.com notes that the multi-family REIT sector has grown 3.9% so far this year -- well behind the 12.4% equity REITs on the whole have enjoyed. Decreasing the budget of the LIHTC or eliminating it would certainly cause a panic for multi-family developers, not to mention financially burdened families.
But even lawmakers in Washington can't ignore the rampant success of the LIHTC. In a research report from Cohn Reznick, we see that in the program's 25-plus-year history, it is enormously effective and efficient. Occupancy level in developments with LIHTC funding has averaged 96%. Considering turnover periods, that is essentially full capacity for coming up on three decades. Additionally, demand for these credits has consistently surpassed supply every year. This fact ensures that these tax dollars are used far more efficiently than most. Perhaps most importantly, from the government's standpoint, the program has a volume limit that allows for exact cost calculations. This is not an F-22 fighter jet runaway budget program.
3. Bargain hunting
In keeping with the theme from the last point, there are plenty of options for investors who may feel as if they are late to the game. Single-family developers such as Lennar and KB Homes have seen tremendous market gains in the past two years. The former's stock has appreciated nearly 120%, while the latter is up 90%. It is not to say that single-family developers will not perform in the coming months and years, but there may be greater opportunity with the lagging multi-family plays.
Take Camden Property Trust , for example. The stock is up around 16% over two years -- respectable, but incongruent with the industry trends. Since 2010, operating cash flow has increased more than 30%. The company pays a 3.5% dividend and trades at 16.5 times projected one-year earnings. For comparison, Lennar trades at 18 times earnings, while KB Homes trades at more than 20 times forward earnings.
There are plenty who say that multi-family rush is over for now, and that you've missed the opportunity. Even though developers are putting up new apartment buildings left and right, the market has yet to deem the space a growth area. This presents an interesting opportunity for those who still want a piece of the pie.
You don't need to go on a multi-family REIT shopping spree, but take a closer look at these companies. They offer income for the dividend investor, and capital appreciation for those who believe the best is yet to come.
As always, keep an eye on the housing numbers as they come out, and remember that there is a gap between housing starts and completions -- this can manipulate month-to-month reports. For now, take comfort in knowing that there is still plenty of opportunity. You aren't too late.
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