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.
Brian A Jackson/Shutterstock.com
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.
8. AvalonBay Communities, Inc. (NYSE:AVB)
Number of Hedge Fund Holders: 34
Avalonbay Communities, Inc. (NYSE:AVB) is a leading multifamily real estate investment trust that develops, redevelops, acquires, and manages apartment homes across 12 US states and Washington, DC. The company focuses on metropolitan areas that boast a vibrant quality of life, higher home prices, and strong employment growth.
Avalonbay Communities, Inc. (NYSE:AVB) operates its apartment communities under four core brands including Avalon which focuses on upscale apartment living and high-end amenities, eaves by Avalon for the cost-conscious segment, Kanso which offers simplicity with moderate pricing, and AVA which is targeted at those in high energy, transit-served neighborhoods. Hence, the firm uses strong brand differentiation to target multiple customer groups within its extensive geographic footprint.
The firm occupies a leadership position in the multifamily housing sector. It owns a well-established portfolio of 281 apartment communities with more than 87,000 units. This portfolio is focused on coastal markets that have delivered solid same-store net operating income growth. While Avalonbay Communities, Inc. (NYSE:AVB) has an irreplaceable portfolio in established regions including New England, metro NY/NJ, Mid-Atlantic, Seattle, Northern, and Southern California, it is growing in other regions such as Raleigh-Durham, Southeast Florida, Denver, Dallas and Austin.
The company has also been benefitting from market conditions such as the strong inclination towards renting rather than buying a home and the low new supply in the firm’s suburban coastal markets. The company is also leveraging development capabilities to drive differentiated growth. Its development activity remains robust as it completed the development of 3 communities comprising 901 apartment homes during the three months ended June 30.
The unparalleled suburban coastal portfolio, superior competitive position among other multifamily residential REITs, and prevailing market dynamics make Avalonbay Communities, Inc. (NYSE:AVB) a good option to be considered among the best residential real estate stocks to buy. As of 2024’s second quarter, the stock is held by 34 hedge funds.
7. PulteGroup, Inc. (NYSE:PHM)
Number of Hedge Fund Holders: 35
PulteGroup, Inc. (NYSE:PHM) is one of America’s largest homebuilders with operations in over 40 major cities. It was founded in 1950 and has delivered almost 750,000 homes across the country. The homebuilder caters to first-time, move-up, and active-adult homebuyers through its brands Pulte, Centex, Del Webb, DiVosta, American West, and John Wieland Homes and Neighborhoods. Through its financial services segment, the company offers mortgage financing and title agency services.
Through a portfolio of industry-leading brands, Pulte serves buyers at every stage of their lives. The Del Webb and DiVosta brands are the recognized leaders for buyers over 55. First-time homebuyers can seek value for their money in a Centex home and the luxury homebuilder John Wieland Homes and Neighborhoods offers new construction and neighborhoods in some of the most desirable locations. These brands position the firm well in the market.
Pulte recently reported another quarter of overall strong financial performance. During the second quarter, earnings increased 19% to $3.83 per share and home sale revenues increased 10% to $4.4 billion. Ryan Marshall, President and Chief Executive Officer of PulteGroup, mentioned the structural shortage of homes due to underbuilding as a favorable dynamic that is rather long-term. For the trailing 12 months, the firm’s return on equity of 27.1% reflects how it efficiently navigated the market conditions.
Pulte is in a good position to drive strong results going forward. While the home builder will be growing its community count growth given the strength of its land pipeline, it continues to start homes at a pace consistent with closing 31,000 homes this year. The company will also be undergoing a transition for its CFO succession planned for February 2025. The new CFO Jim Ossowski, currently Senior Vice President of Finance, has a tremendous 22-year career at the company.
Pulte benefits from one of the leading positions in the US housing market, prevailing market conditions, a portfolio of leading brands, and a strong financial performance. Additionally, PulteGroup, Inc. (NYSE:PHM) is currently cheap as it trades at 11 times its forward earnings, a discount of 34.36% to the sector. The stock ranks 7th among the 10 best residential real estate stocks to buy.
6. Tri Pointe Homes, Inc. (NYSE:TPH)
Number of Hedge Fund Holders: 35
Tri Pointe Homes, Inc. (NYSE:TPH) is one of the largest home builders in the United States. The publicly traded company has operations in 12 states and the District of Columbia. The home builder has been engaging in the construction of premium homes and communities with deep ties to the communities it serves.
Tri Pointe Homes, Inc. (NYSE:TPH) is a recognized leader in innovative design, energy efficiency, customer experience, and environmentally friendly business practices. The home builder has created a diversified portfolio of markets which extends its market coverage. Apart from the national reach and local market expertise, the firm has a significant supply of high-quality land assets in strong housing markets.
While the home builder focuses on expanding scale in existing markets while creating a foundation for organic growth in 3 new markets, it drives a commendable performance. With a 38% year-over-year increase in home sales, the firm closed a successful second quarter. Net income and diluted earnings per share witnessed a rise of 94% and 108%, year-over-year, respectively. The firm benefitted from the strength of demand in its core markets with a strong buyer profile which financed with its mortgage company.
While the traffic and orders improved throughout July with mortgage rates dropping below 7%, the firm will be balancing pace and price to meet its overall sales objectives in the typically slow summer months. The firm is poised to grow with favorable demand trends for new housing among millennials and Gen Z, land availability, and as labor resources continue to be a strength. It is fueling further growth and geographic diversification through penetrating Coastal Carolinas, Orlando, and Utah.
Tri Pointe Homes, Inc. (NYSE:TPH) serves as a strong company with local market expertise and national reach as well as a strong financial performance. As of Q2, the stock is held by 35 hedge funds.
5. Camden Property Trust (NYSE:CPT)
Number of Hedge Fund Holders: 35
Camden Property Trust (NYSE:CPT) is a REIT that serves as one of the largest publicly traded multifamily companies in the United States. The company engages in the ownership, management, development, redevelopment, acquisition, and construction of multifamily apartment communities in the country. It owned and operated 172 properties comprising 58,250 apartment homes as of August 31, 2024.
Camden Property Trust (NYSE:CPT) focuses on high-growth markets boasting robust employment and population growth, from where it derives over 95% of its net operating income. The REIT operates a diverse portfolio of assets with more than 58,000 apartment homes positioned in 15 major US markets. Camden’s resident profile is high quality with an average annual household income of approximately $121,000 and an average rent-to-income ratio of 19% for new move‐ins in 2024 to date. Furthermore, it has delivered consistent earnings and dividend growth since 2020.
With a strong demand for multifamily rental housing, the market trends align in the favor of the company. Net apartment demand was over 200,000 apartments during the first half of the year. Nearly 70% of young adults choose to rent while pent-up demand is also coming from those young adults living at home. The homeownership rate for these adults is significantly low and the propensity to rent stands high in Camden markets. The share opting for apartments is also increasing as more households are making the choice to live alone.
For the year’s second quarter, the REIT reported a core FFO of $1.71 per share which was $0.04 ahead of the midpoint of its prior quarterly guidance. Development activity remained strong. Camden completed construction on an 189-unit $71 million single-family rental community situated in Texas while beginning construction of a 420-unit $163 million 4-story garden-style new development, and a 349-unit $154 million 3-story garden-style new development.
With the monthly cost of owning a home almost 60% more than leasing an apartment, the market seems promising for Camden Property Trust (NYSE:CPT). Considering the firm’s aforementioned successful strategy and the tailwinds, it is an attractive residential real estate company to consider.
4. Toll Brothers, Inc. (NYSE:TOL)
Number of Hedge Fund Holders: 46
Toll Brothers, Inc. (NYSE:TOL) was founded in southeastern Pennsylvania in 1967 by the brothers Bob and Bruce who wanted to create a home-building company that was always striving to reach a higher standard. The firm expanded across the US over the years and emerged as America’s luxury home builder. Currently, it operates in 24 states and over 60 markets nationwide.
The home builder’s national footprint positions it well for growth. The growth prospects are even stronger as it has the widest variety of products and the widest range of prices of any of the builders. The prestigious and desirable locations to build in, distinctive architecture, unrivaled choice, and exceptional customer service are some of the Toll Brothers’ advantages that set them apart from the competition.
Toll Brothers recently witnessed a record third-quarter home sales revenue of $2.72 billion. Since the current market is experiencing a general housing inventory shortage and falling mortgage rates, the prospects for the home builder remain positive. Notable demographic trends that will benefit the firm’s business in the future will be the baby boomers looking for new houses as they retire and the older millennials hitting their 40s over the next decade.
The home builder has sufficient land under control as it plans to grow its community count next year. At the quarter end, it owned or controlled 72,700 lots. This strong land position offers sufficient lots required for growth in fiscal 2025 and later. Leveraging this position, Toll Brothers is striving for its goal of operating from 410 communities by fiscal year-end, an expected 11% growth as compared to the year’s start.
Toll Brothers has brought its sales up 25% year-to-date amid elevated mortgage rates. The unique advantages in an industry as competitive as housing, favoring trends, a healthy balance sheet with low net debt, and planned growth opportunities rank Toll Brothers, Inc. (NYSE:TOL) among the best residential real estate stocks to buy.
3. NVR, Inc. (NYSE:NVR)
Number of Hedge Fund Holders: 47
The American home builder NVR, Inc. (NYSE:NVR) is headquartered in Reston, Virginia. The company’s homebuilding operations sell and construct homes under three brand names including Ryan Homes, NVHomes, and Heartland Homes. NVR also operates a mortgage subsidiary for its home buyers whereas NVR Settlement Services subsidiary offers settlement and title services.
Historically, NVR, Inc. (NYSE:NVR) has been one of the market leaders in each of the markets where it builds homes. This has enabled the firm to achieve competitive advantages while experiencing a growth trajectory within these markets. The firm’s financial performance is a testament to its market-leading position. Over the decade, NVR has grown its top line by 8.81% and its bottom line by 19.64%.
Among its peers, NVR, Inc. (NYSE:NVR) has a solid market capitalization of $29.01 billion. The firm kicked off the new year with a year-over-year profit increase of 14% despite the extremely tight housing market. The home builder is also remarked for its impressive return on equity of 39.54% which clearly indicates that the firm has proficiently generated profits and surpasses major competitors including Pulte, Toll Brothers, and Taylor Morrison by a prominent margin.
The business segments ‘homebuilding’ and ‘mortgage banking’ are a strength for the home builder. During the second quarter of 2024, homebuilding revenues rose 12% from $2.28 billion in 2023 to $2.55 billion in this quarter. New orders increased by 3% to 6,067 units as compared to 5,905 units in the second quarter of 2023. Income before tax from the homebuilding segment climbed 12% while income before tax from the mortgage banking segment went up by 23%, year-over-year.
More than 555,000 homeowners have trusted NVR for their families which reflects the home builder’s strength and reputation. As of Q2, the firm is held by 47 hedge funds thereby ranking on our list. Diamond Hill Capital is the largest shareholder in the company.
2. Lennar Corporation (NYSE:LEN)
Number of Hedge Fund Holders: 60
Lennar Corporation (NYSE:LEN) is another prominent American home builder that constructs affordable, move-up, and active adult homes under the Lennar brand name. The company offers mortgage financing, title, and closing services under its Financial Services segment while mortgage loans are originated by LMF Commercial. Lennar’s Multifamily segment develops high-quality multifamily rental properties.
Lennar falls among the nation’s largest builders of quality homes with its 70 years of operation and in terms of deliveries, revenues, and net earnings. Homebuilding operations are the most substantial part of Lennar’s business and generated $33 billion in revenues in fiscal 2023. The firm has been resilient against the uncertain microenvironment. The company grew in its current markets by pricing homes based on demand at levels that would maintain the sales pace, also known as the dynamic pricing model. Furthermore, the firm’s strong balance sheet and solid liquidity enable sufficient financial flexibility as it moves ahead.
Lennar continues to drive momentum through 2024. Although interest rates rose for most of the second quarter, the home builder remained resilient and performed well. The firm recorded a 19% increase in new orders and a 15% increase in deliveries year-over-year. In homebuilding, revenues increased 9% to $8.4 billion as compared to $7.6 billion in the prior year period. The firm is on target to deliver approximately 80,000 homes for the year while it plans to completely move to a pure-play and land-light operating structure across its homebuilding platform and each of its 40 homebuilding divisions, to drive better growth and cash flow.
The status of a leading American homebuilder, the capability of building affordable housing in strategic markets addressing the existing supply deficit, and a strong balance sheet deem Lennar Corporation (NYSE:LEN) another top residential real estate stock to invest in.
1. D.R. Horton, Inc. (NYSE:DHI)
Number of Hedge Fund Holders: 62
D.R. Horton, Inc. (NYSE:DHI) is an American home builder selling homes in 113 markets across 33 states in the country. Other than homebuilding, it offers other services such as mortgage, title, and insurance. D.R. Horton has Express Series for first-time homebuyers, Emerald Series for high-end homes, and Freedom Series for easy living and low maintenance. For those who cannot own a home, the company offers rental communities.
D.R. Horton, Inc. (NYSE:DHI) has been America’s largest home builder by volume since 2002 which makes it a market leader. On September 30, 2023, the home builder was found to be the largest builder in 3 of the top 5 US housing markets and in 52 of the 118 markets in which it operated. During the trailing twelve months ended June 30, the firm closed 94,255 homes. The firm’s diverse product offerings and price points in the current market also offer a competitive advantage.
During the fiscal third quarter, the firm recorded earnings per share of $4.10, up 5% year-over-year. Home sales revenues of $9.2 billion were secured on 24,155 homes closed in the quarter. With affordable offerings and flexible lot supply in a housing market that is a victim of decades of underbuilding, D.R. Horton, Inc. (NYSE:DHI) is well-positioned to grow and perform well.
The firm is in a strategic relationship with Forestar, a public residential lot development company that is a majority-owned subsidiary of D.R. Horton. In the third quarter, $270 million of the finished lots the firm purchased were from Forestar. Forestar’s robust balance sheet and ample lot supply position them well enough to capitalize on the shortage of finished lots in the homebuilding market.
Based on clear market dominance, robust financials, and demographics supporting housing demand, DHI ranks among the 10 best residential real estate stocks to buy. The stock was held by 62 hedge funds, as of Q2 2024. Greenhaven Associates was the largest shareholder in the company.
While we acknowledge the potential of DHI as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than DHI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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