We recently compiled a list of the 10 Best Real Estate and Realty Stocks To Buy According to Hedge Funds. In this article, we are going to take a look at where Avalonbay Communities, Inc. (NYSE:AVB) stands against the other real estate and realty stocks.
US Real Estate: A Market Stuck for Too Long
Soaring mortgage rates and sky-high home prices have pushed American homebuyers out of the market for long. The situation seems demoralizing as economists at Bank of America expected the market to remain stuck until 2026 or even longer. Home prices are expected to rise by 4.5% in 2024 and then by another 5% in 2025. A critical issue hurting first-time buyers is the rate lock-in effect, the effect due to which existing homeowners remain unwilling to sell their houses since they will have to pay a higher mortgage on a new home. While this effect has restricted the supply of homes in the market, it might persist for another 6 to 8 years. In such conditions, the divide between have and have nots has amplified since current homeowners have more financial flexibility while a large proportion can simply not afford to own a house.
Long Awaited Fed Rate Cuts: What Can We Expect?
With mortgage rates currently dropping to their lowest since May 2023, the mortgage demand from both homebuyers and homeowners surged as the applications to refinance a home loan climbed. The housing industry has its eyes on the interest rate cut which had been signaled by the Fed to take place in September. Some experts believe that it could ease the affordability concerns of homebuyers in the short run. However, the cut has been expected to be rather small than replicating the historically low rates during the pandemic. On the contrary, Nick Villa, a Moody’s economist, is of the opinion that the rate cut is unlikely to solve the housing crisis although a lower mortgage rate might offer some relief. Even after the rate cut, homebuyers will have to be patient with the limited housing supply which continues to be the core and unaddressed problem in the market.
It is important to consider the Fed’s rate impact on homebuilders as well. Evercore ISI head of housing research, Stephen Kim, in an interview with CNBC, shed light on how the currently dropping rates have set homebuilders for a nice fall which will witness a rebound in demand. He pointed out the same short supply dilemma where the US has 3.8 months of supply of resale homes on the market which used to be 5 to 6 months, normally. Under these circumstances, he expects a really tight market with low pressure on home prices. While the Fed actually cutting rates might not have a huge impact on mortgage rates, it will drive the would-be homebuyers out of their places to look for a home. In conclusion, the future of the US housing market seems promising for homebuilders while homebuyers might be subject to temporary gratification since the interest rate cut won’t make that much of an impact on the mortgage rate and on a market deeply plagued with the unavailability of houses.
Our Methodology:
In order to compile a list of the 10 best real estate and realty stocks to buy according to hedge funds, we first use a stock screener to make an extended list of the relevant 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 real estate and realty stocks to buy according to hedge funds have been arranged in ascending order of the number of hedge funds that have stakes in them, as of Q1 2024.
Why are we interested in 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).
An aerial view of a bustling metropolitan area with high-rise buildings and busy streets.
Avalonbay Communities, Inc. (NYSE:AVB)
Number of Hedge Fund Holders: 42
Avalonbay Communities, Inc. (NYSE:AVB) is a multifamily REIT that develops, redevelops, acquires, and manages apartment homes in some of the top markets across 12 US states and Washington, DC. The company focuses on metropolitan areas with vibrant quality of life, low housing affordability, and strong employment growth.
With a solid market capitalization of $29.71 billion and a net income margin of 29.41% exceeding the industry average, the firm occupies a strong presence in the multifamily housing sector. The company 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 (NOI) growth. Although the firm faced a setback during the pandemic when people chose rural and suburban areas over cities, it has been resilient. Speaking of now, the second quarter of 2024 marked turnover well below historical levels which supported healthy occupancy for the REIT.
During the year’s second quarter, Avalonbay Communities was successful in beating revenue expectations. The company heavily favored 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’s development activity remains robust as it completed the development of 3 communities comprising 901 apartment homes during the three months ended June 30. It also had 17 consolidated Development communities under construction which will contain 6,066 apartment homes and 65,000 square feet of commercial space which shows the drive for growth in the future.
Avalonbay Communities, Inc. (NYSE:AVB) ranks among the 10 best real estate and realty stocks according to hedge funds. The coastal-focused portfolio and superior competitive position among other multifamily residential REITs make the company a good option to be considered.
Overall AVB ranks 6th on our list of the best real estate and realty stocks to buy. While we acknowledge the potential of AVB as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than AVB but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.