In this article, we will take a look at the current housing conditions while analyzing the 10 best residential real estate stocks to buy.
Home Buyers Have More Bargaining Power than Sellers, Says Economist
The rate hikes which started in March 2022 as a battle against inflation are coming to an end as the Federal Reserve finally decided to cut rates for the first time since 2020. The rate cuts were kicked off with a half-percentage point reduction on September 18. This long-awaited move lowered rates to about 4.875%, at the midpoint. With an optimistic view in mind about inflation cooling off, the big rate cut will be catering to the employment slowdown. The news just doesn’t end here since the officials have pointed to another half-point reduction before the year’s end.
For the housing market, the big rate cut could be taken as a signal from the Fed to reverse the mortgage lock-in effect but the extent of easing matters. While an aggressive reduction in rates will reduce financing costs, create an inventory of existing homes, and reduce pressure on home prices, a gradual reduction won’t be of much value for the homeowners who are holding on to their early-pandemic low mortgage rates. The anticipation of a rate cut at the September Fed meeting has brought down mortgage rates to as low as their lowest since February 2023. However, the dropping mortgage rates are a double-edged sword as they could potentially raise the demand so much thereby making home buying even harder.
In an interview with CNBC, Senior Economist Orphe Divounguy from Zillow emphasized the impact of rate cuts on housing affordability. Although affordability remains a challenge, the market is improving. In his opinion, the best time to act for home buyers is right now as the current scenario offers them a perfect entry point with more options and bargaining power being somewhat shifted from the sellers to the buyers. The number of active listings on the real estate platform has gone up by 22% since last year. Although short-term rates are expected to decline, longer-term rates like mortgage rates could remain at the current level. He expects more buyers than sellers in the market with improving affordability. Sellers will also be in good shape as well-priced and well-marketed homes are selling in just 20 days, according to company data.
With that being said, let’s move to the 10 best residential real estate stocks to buy.
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Our Methodology:
In order to compile a list of the 10 best residential real estate stocks to buy, we first used a stock screener to make an extended list of the residential real estate companies with the highest market caps. Moving on, we shortlisted the top 10 stocks from our list which had the highest number of hedge fund holders. The 10 best residential real estate stocks to buy have been arranged in ascending order of their hedge fund holders as of Q2 2024.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
10 Best Residential Real Estate Stocks To Buy
10. Equity LifeStyle Properties, Inc. (NYSE:ELS)
Number of Hedge Fund Holders: 32
Equity LifeStyle Properties, Inc. (NYSE:ELS) is a residential real estate investment trust based in Chicago. The company owns and operates a portfolio of manufactured home communities, rental homes, and RV campgrounds across the United States. The REIT offers housing options and vacation opportunities in some of the most desirable housing markets and vacation destinations in the country.
Over the 50 years in business, Equity LifeStyle Properties, Inc. (NYSE:ELS) has transformed the image of the site-set housing industry. The firm has a strong national presence and a commendable industry reputation. While its presence in 35 states and British Columbia mitigates the risk of economic downtown in a specific area, it results in a strong brand awareness of the company’s commitment to the high end of the market. Additionally, the company’s properties stand extremely valuable since they are one-of-a-kind and positioned where such developments can’t be built anymore.
Equity LifeStyle Properties, Inc. (NYSE:ELS) has one of the country’s largest real estate networks with 450 properties with 171,477 sites in 35 states and British Columbia. The firm is currently demonstrating performance that exceeds expectations. For the first six months of 2024, the company reported a 6.4% increase in net operating income. Driven by the continued strength in annual revenue and reduced expenses throughout the portfolio, normalized FFO growth of 5.9% year-to-date was recorded.
The high-quality portfolio of premier communities, prominent history in the site-set housing industry, and a strong balance sheet make the Equity LifeStyle Properties, Inc. (NYSE:ELS) attractive. As of Q2, the stock is held by 32 hedge funds. Balyasny Asset Management is the largest shareholder in the company.
9. Meritage Homes Corporation (NYSE:MTH)
Number of Hedge Fund Holders: 33
Meritage Homes Corporation (NYSE:MTH) is the 5th largest American homebuilder based on the homes closed in the year 2023. The home builder provides energy-efficient and affordable entry-level and first-move-up homes. It operates in multiple states including Arizona, California, Colorado, Utah, Texas, Florida, Georgia, North Carolina, South Carolina, and Tennessee.
Meritage has successfully delivered 185,000 homes during its 38 years in business. The firm leads the way in energy-efficient homes. What sets Meritage apart from other builders who install slapped-on features is that the firm thoughtfully engineers every component starting from the foundation. The home builder opens the door to a life built better since the features in every Meritage home work seamlessly together to deliver energy savings while the pricing stays transparent.
Meritage outperformed during the fiscal second quarter with home closing revenue climbing 10% year-over-year to $1.7 billion. The firm also increased its community count sequentially from the first quarter and accomplished an average absorption pace of 4.5 per month which led to the highest second quarter orders volume of 3,799 homes.
The firm’s focus on affordable move-in ready inventory enables it to accelerate its growth amid an underbuilt supply of homes. With strong order growth across all markets including those with increasing resale inventory, the future outlook remains optimistic. To further boost growth, the home builder is investing in land acquisition and development. Land acquisition and development spending was $631.1 million for the second quarter of 2024 as compared to $408.5 million for the prior-year period. Simultaneously, over 8,700 net new lots were added in the quarter which represents an estimated 63 future communities.
The quick turning move-in ready homes competitive advantage, a strong balance sheet, momentum in land and development investment, and robust delivery of results have positioned Meritage Homes Corporation (NYSE:MTH) for a growing market share.
