Two weeks ago, we learned that interest in pre-owned homes in the U.S. rose unexpectedly in August. While economists were calling for a mere 0.2% uptick, pending home sales actually jumped 4%.
That coincided with the 30-year mortgage rate sliding from 6.72% at the end of July to 6.56% in the final full week of August. And since that figure has fallen further to 6.34%, we’re hoping for another positive showing when September’s data comes out.
Could the housing market finally be ready to recover?
I’m sorry to say, but it’s still too soon to truly tell.
Here’s why…
Coming off the Lows
Keep in mind that August’s 4% rise in pending home sales was off of intense lows – the worst we’ve seen since 1995.
This remains an extremely depressed housing market due to historically high asking prices, mortgage rates that, while down, are still near 20-year highs, and a jobs market that needs its own rebound.
That’s one reason why – with a few exceptions – I don’t think it’s the right time to buy into homebuilders just yet. I know that Buffett bought into them two months ago. And Trump is now urging them to take advantage of more friendly operations over at Fannie Mae and Freddie Mac.
Even so, as I explained yesterday, homebuilders’ valuations in general remain too high for my liking – especially when compared with the depleted customer base they’re working with. So, I’m holding off for the time being.
What about residential real estate itself?
With the upbeat sales figures, perhaps these assets could be great investments going forward?
The answer is… maybe. But you first need to understand what type of “investment” your house really is.
Your House Isn’t the Investment You Think It Is
The housing craze we saw in 2020, 2021, and 2022 was dangerous on multiple levels – including how it pushed so many people into purchases they didn’t fully understand.
Most assumed that houses were “sure thing” investments. And while homes can be worth owning, they’re not always the best place to put your money.
One of the most frequently asked questions I get in my line of work is, “Does my house count toward my real estate investment holdings?” It comes up so often that I wrote about it in REITs for Dummies.
The simple answer is no, and here’s why:
Homeownership may be desirable for many people, and a home can be a valuable asset over time. However, a house is considered a consumption item, not an actual investment.
Hate to break it to you if you’ve been thinking otherwise, but primary residences don’t generate income. They consume it in the form of mortgage interest, real estate taxes, insurance payments, utility expenses, and the costs of repairs and maintenance.
If you own a home, you already know what I mean – they’re expensive, and not just to buy. Mortgage interest, taxes, insurance. It adds up. And that’s before you consider maintenance. Because something is always breaking.
And when it’s time to sell, you’re hit again – closing costs, moving costs, capital gains taxes (mostly if it’s not your primary residence).
Homeownership can be rewarding. But houses are consumer items. They’re not investments. Not really.
That said, it doesn’t mean other types of real estate can’t be phenomenal investments over time.
Real Estate That Pays You
I’m talking about real estate investment trusts (“REITs”), which pay literal dividends almost every single time.
REITs generate income that’s then distributed to shareholders via tax-advantaged dividends. Most importantly, “publicly traded REITs are highly liquid investments diversified across different types of properties – typically dozens, hundreds, or even thousands of them – and geographic locations.”
This income-oriented asset class is a great way to achieve an American dream that goes beyond just owning a house: financial freedom.
Holding stocks that consistently pay – and, better yet, raise – their dividends every single year is a great way to build up your net worth. This isn’t a get-rich-quick scheme. It’s a get-rich-slowly-but-surely strategy.
The longer you hold REITs and other strong dividend payers, the greater your chances of achieving a life that’s free from financial fears. Who knows, you could even find yourself owning not just one house, but two as a result.
Living the American Dream
The American dream can be achieved in more ways than one. Homeownership is still out of reach for most people. But… you have to live somewhere.
Which is why I’m laser-focused on multifamily and apartment real estate right now.
Apartments are a logical starting point for so many families in their housing journeys. That’s why multifamily, or apartment, REITs can be such solid portfolio considerations.
There are over a dozen of these publicly traded companies listed on major U.S. exchanges. But one stands out especially to me in today’s housing market environment.
That’s Mid-America Apartment Communities (MAA).
This multifamily REIT owns 104,347 apartment homes across 16 states and Washington, D.C. Based in Nashville, Tennessee, it focuses on Sun Belt growth markets like:
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Atlanta, Georgia
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Dallas, Austin, and Houston, Texas
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Orlando and Tampa, Florida
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Charlotte, North Carolina
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My hometown of Greenville, South Carolina
These markets continue to benefit from higher job growth, higher wage growth, stronger household formation, and other demographic tailwinds that are essential building blocks for value creation.
Mid-America’s growth is centered on its fortress balance sheet. And when I say “fortress,” I’m not kidding. This company is one of just 10 U.S. REITs with an A- rating or above.
That designation makes sense considering how Mid-America has around $1 billion in combined cash and borrowing capacity. Its net debt to earnings before interest, taxes, depreciation, and amortization, meanwhile, is a very healthy 4 times.
Shares are now trading at $135.85 with a price to adjusted funds from operations multiple of 17.4 times. As you can see on the FAST Graph below, their normal multiple is 19 times.
In short, interested investors are looking at a definitive margin of safety.
Mid-America’s dividend yield is 4.5%. And Wide Moat Research is forecasting shares to return 15% to 25% over the next 12 months.
Source: FAST Graphs
That kind of investment – when held in a well-managed and properly diversified portfolio – is what makes the American dream look like a reality before long.
Regards,
Brad Thomas
Editor, Wide Moat Daily
PS: Make sure to subscribe to our YouTube show. Today, Nick Ward and I discuss the physical real estate fueling the AI boom. Catch it right here.
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