The rate of home purchases has slowed dramatically. Since the start of the year, mortgage rates have doubled from around 3% to more than 6%. The affordability of homes has plummeted, as have sales. Yet individuals and families still have to live somewhere, so slowing home sales will benefit companies with residential rentals.
Here are some of my favorites…
The National Association of Realtors recently reported that May 2022 home sales declined by 3.4% from April and 8.7% since May 2021. Single-family home sales were down 7.7%, while townhome and condo sales dropped by 15.3% compared to last year.
Last month, the average rate for a conventional 30-year fixed mortgage was 5.38%. With rates above 6% in June, sales should continue to fall.
Higher interest rates result in higher mortgage payments, which make a home purchase unaffordable for a larger number of potential buyers. For example, on a $400,000 mortgage, going from 4% to 6% increases the monthly payment by $500 per month. And even if a buyer could swing the extra cash, lenders have limits for payment-to-income ratios.
As I noted above, everybody needs to live somewhere; if they can’t afford to buy a home, they will need to rent. Rental choices include multi-family residences, such as apartments, and rental single-family homes (SFRs).
While apartment/multi-family REITs have been around for decades, SFR ownership was primarily in the hands of individual or private company investors.
The rise of SFR REITs occurred over the last decade, with their home acquisitions ramping up dramatically over the last few years. Currently, investors can invest in single-family rental homes through three REITs. For all three, investors will generate total returns driven by dividend growth.
Invitation Homes Inc. (INVH), with a $20 billion market cap, is the largest of the three. The company owns 82,000 rental homes located primarily in the southwestern and southeastern United States. The company reported a blended lease rate growth of 11.8% for May, with 98% occupancy.
For 2022, INVH increased its dividend by 29%. The current yield is 2.6%.
American Homes 4 Rent (AMH) has a $13 billion market cap and owns 58,000 rental homes. Core net operating income (NOI) increased by 10.8% year-over-year for the most recent quarter. AMH increased its dividend by 100% for 2021 and 80% for 2022. The current yield is 2.2%.
Tricon Residential Inc. (TCN) sports a $2.6 billion market value and owns 31,000 rentals. The most recent report shows 7.8% blended rent growth resulting in 11.1% growth in net operating income. The TCN dividend grows almost every quarter, with the payout up 3.5% in the last year. The shares yield 2.3%.
With homes becoming less affordable, SFR lease rates should continue to grow at double-digit rates. These REITs provide an inflation hedge and solid total return prospects…
And they’re just three high-dividend, low-risk, and inflation-hedged stocks in my Dividend Hunter portfolio of more than 30 such stocks. You can get the full portfolio, and my 36-month plan for generating a lifetime of income, today – just click here to see how.