The housing market is a mixed bag these days. And when I say “mixed bag,” I mean a bag I’d largely like to leave alone.
With few exceptions, I just don’t envy homebuilders. Toll Brothers (TOL) is one of the exceptions, but that’s because it sells luxury homes – which is a whole different ballgame. The rest of the housing market continues to prove much more difficult.
We did learn recently that sales of new single-family homes in April rose 10.9% from March to 743,000 units. So that’s good news.
However, the good news is on top of a lot of bad news.
The housing market boom we saw in 2020, 2021, and even 2022 seems to be long gone by now. Have a look at the chart below and you’ll see what I mean:
Source: Federal Reserve Economic Data
Notice the big upswing in sales of single-family homes starting in 2020 as interest rates fell. But then, rates rise quickly in 2022. Mortgages rise. And home sales plateau.
Between inflation waging war on Americans’ ability to save… home prices being so exceptionally elevated… and mortgage rates remaining high…
Most people remain unable to afford a new house. In fact, houses are now the least affordable they’ve been in two decades. The next chart tells the story.
Source: Atlanta Fed
This is the Home Ownership Affordability Monitor, tracked by the Atlanta Federal Reserve. It shows the average cost of homeownership (housing prices, interest, insurance, PMI, etc.) relative to the median U.S. income. At 46%, as of March, those costs are among the highest in two decades, and well above the “affordability threshold.”
So, while April’s figures are welcome, you have to remember that the larger picture is still far from ideal.
Even my hometown of Spartanburg, South Carolina – which is growing by leaps and bounds – isn’t moving homes the way it should be. Redfin reported last month that it was taking an average 55 days to sell a house there. And I’ve personally seen several sets of new townhomes that simply aren’t selling at all.
They’ve even been sitting there long enough that I’m looking into purchasing them and renting them out.
After all, just because people aren’t buying homes doesn’t mean they don’t need them.
The Rise of the Single-Family Rental Corporation
Traditionally, the question of housing has always come down to buying a place or renting it. You either purchased a home or you signed a lease, typically with an apartment building.
In some relatively rare cases, you might rent an entire house from a private owner. Traditionally, that was a mom-and-pop operation, hardly industry-level activity… until the housing market crash of 2008.
In the wake of all that destruction, people lost their jobs and their homes. And already burdened banks became even more so with foreclosed houses that nobody wanted to buy.
It was an abject mess.
But necessity is the mother of invention. And in the years that followed, we saw the rise of the single-family rental (“SFR”) corporation.
These big business entities began buying houses on the cheap, oftentimes directly from distressed owners, then renting them right back. This gave cash-strapped families the chance to stay in their homes… and SFR companies a fairly steady stream of income.
Nor did that cash dry up as time went on. The fallout from 2008 kept people from pursuing actual homeownership for years, whether from fear or lack of funds.
Then the shutdowns that fueled the housing craze of 2020 saw wannabe owners get shot down five times… seven times… 13… or more, leaving many happy to settle for renting a home instead.
And now, today’s miserably high home and mortgage costs continue to weigh on the traditional market. So, yet again, SFR firms are winning out.
These businesses just aren’t facing the same hurdles that regular homebuilders are. Neither are their investors, who benefit from multiple angles:
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They get to participate in the housing market without worrying about mortgages.
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They get the financial benefits of rental properties without the bother of dealing with associated tenant, tax, and maintenance issues.
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They get the advantages of big-business scaling, where SFR companies have larger resource pools to profit from.
This is especially true of SFR real estate investment trusts, or REITs.
Two Flagship Single-Family Rental REITs
There are a growing number of single-family rental REITs today, but I’m going to cover the two biggest today… starting with American Homes 4 Rent (AMH).
Formed in 2012 and listed on the New York Stock Exchange in 2013, it owns over 61,000 SFR properties across the Southeast, Midwest, Southwest, and Mountain West. That gives it a market cap of around $13.8 billion, making it the second largest publicly traded SFR landlord.
AMH also boasts a strong balance sheet with a BBB rating from S&P. As shown below, its steady earnings history has provided investors with very predictable growth. That includes its dividend offerings, which it has raised an average 18% over the last three years.
Source: FAST Graphs
Shares are attractively priced around $37.25, with a price-to-adjusted-funds-from-operations (P/AFFO) multiple of 23.2x. That’s compared with its historical average of 25x. And its dividend is yielding 3.2%.
Analysts estimate that AMH will grow 5% in 2026 and 6% in 2027, which suggests continued dividend growth. We see shares returning around 15% annually.
Next up is Invitation Homes (INVH), which was also formed in 2012, though it didn’t go public until 2017. As of last year, it owned 85,138 homes flat out with another 7,622 that are jointly owned. These properties are primarily located in Western and Southern U.S. markets.
INVH has a $20.3 billion market cap, making it the largest REIT of its kind. And, like runner-up AMH, it sports a BBB credit rating. It has steady earnings and increasing dividends, too, though not quite as robust.
Source: FAST Graphs
Even so, shares are attractively priced around $33.20 with a dividend yield of 3.5%. That gives them a 20.6x P/AFFO multiple compared with a historical average of 24.7x.
Analysts estimate INVH will grow 5% in 2026 and 5% in 2027, and we see shares returning around 15% annually.
Bottom line: The housing market may have its continuing troubles, but the housing rental market is booming. And I don’t see that changing anytime soon.
Regards,
Brad Thomas
Editor, Wide Moat Daily