What Do Falling Home Sales Mean for Single-Family REITs?

What Do Falling Home Sales Mean for Single-Family REITs?

Everything is new for single-family real estate investment trusts (REITs). So you need to think deeply about what a five-month slowdown in existing home sales might mean for Silver Bay Realty , American Homes 4 Rent , and American Residential Properties .

While the getting's good
As the single-family REIT sector reaches its one-year birthday, this new industry's players have been growing their portfolios quickly. Silver Bay grew its portfolio by 66% through September, buying 2,259 homes. American Residential increased its size by a third in the third quarter alone when it added 1,351 homes. And American Homes 4 Rent added nearly 3,000 homes to its industry-leading portfolio of around 20,000 properties in the quarter.

The buying spree has been spurred by the same window of opportunity that allowed for this new niche's creation: the 2007 to 2009 recession and housing debacle that left single-family homes at bargain-bin prices. That said, prices have been rising, making it harder to buy low. Interestingly, even though Silver Bay has been a big buyer so far this year, it took a breather in the third quarter.

"In the third quarter we dramatically slowed our acquisition pace and focused on stabilizing the portfolio. As a result, the number of homes in the portfolio has remained relatively unchanged since the second quarter," according to the company. Since both American Homes and American Residential kept up the purchase pace, it would be easy to suggest that Silver Bay is the outlier.

However, Silver Bay noted that its markets saw price gains between 3% and 10% in the three months through August. Those are big gains in a short period of time. That said, management also stated that "most of our markets continued to be 30% to 45% off-peak pricing and remain at significant discounts to replacement costs." Then why not buy more properties?

Not so public, or maybe more so
Interestingly, American Homes 4 Rent said it plans to slow its purchases in the fourth quarter. On the acquisition front, it's focusing on auctions and pulling back from lower-end properties. In other words, it's both trying to ensure it's buying at a bulk-price discount and focusing on higher-end fare.

With prices in the residential market moving higher, staying out of the "mom and pop" competition for the remaining housing stock sounds like a good plan. But American Residential noted that it's likely to slow its acquisitions, too, avoiding bulk purchases. That's pretty much the exact opposite of American Homes.

What gives?
Although some of these variations come from location preferences, these REITs have notable overlap in their portfolios. So there's no clear direction right now except that a trend toward fewer purchases seems to be the norm. That's following the broader industry trend, and higher prices clearly have something to do with it.

Slowing down isn't the worst-case scenario, however, since these REITs have a lot of work on their hands to fix up and lease out their existing portfolios. That will help shift them from growth mode to the point where they can pass more income on to shareholders. (Only American Residential has yet to announce a dividend policy.)

Paying dividends, a mandate of the REIT structure, however, leaves little room to grow a portfolio without tapping the capital markets. Getting money could become increasingly difficult if the returns aren't high enough because home prices have jumped. That, in turn, would limit long-term growth. In fact, regardless of whether or not we are there today, the housing market will eventually recover to the point where aggressive expansion won't make financial sense.

Since rents can't go up much faster than inflation, and the big home price gains are more likely behind us than ahead, what are you buying here if portfolio growth slows to a crawl? The yields offered by American Homes and Silver Bay are relatively low today -- I think they'll have to go much higher before single-family REITs are an attractive long-term investment.

Stocks paying big dividends today
Dividend stocks can make you rich. It's as simple as that. While they don't garner the notoriety of high-flying growth stocks, they're also less likely to crash and burn. And over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine. With this in mind, our analysts sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list in this free report of nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.

The article What Do Falling Home Sales Mean for Single-Family REITs? originally appeared on Fool.com.

Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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 Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Originally published