U.S. Apartment Values 'Will Plunge A Further 20%,' Economists Say, But Wall Street Still Sees Major Upside In These REITs — Be Greedy When Others Are Fearful?

After falling for seven straight months, the Case-Shiller U.S. National Home Price Index finally showed upticks in February and March. But according to economics research firm Capital Economics, the decline in the housing market is far from over.

In their latest report, Capital Economics researchers point out that the increase in home prices in February and March was because of higher demand as a result of declining mortgage rates at the start of this year. But that will prove to be short-lived.

“Rates have since returned close to the double-decade highs set in October, which has caused demand to fall to its lowest levels in almost 30 years,” the report stated.

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The economists suggest that because of high mortgage rates and a weakening economy, home prices will start declining again later this year.

“We expect apartment capital values will plunge a further 20% in 2023 and 2024, resulting in a peak-to-trough fall of around 25%.”

It’s a scary picture. But not everyone shares the same outlook.

‘A Big Beneficiary On The Way Out’

Billionaire investor Stanley Druckenmiller recently said that housing “has obviously gone down dramatically given the 500 basis-point increase in interest rates.”

But this is not doom and gloom, as the investing legend noted that there’s now a “structural shortage in single-family homes.”

“So if things got bad enough, I could actually see housing — which is about the last thing you would think of intuitively — could be a big beneficiary on the way out,” Druckenmiller said.

The reality is, no matter what happens, people will always need a place to live. Meanwhile, elevated mortgage rates mean owning a home is less feasible. And when people can’t afford to buy a home, renting becomes the only option. This creates a stable rental income stream for landlords.

But you don’t actually need to buy a house to start collecting rental income. 

Be Greedy When Others Are Fearful

Publicly traded real estate investment trusts (REITs) own income-producing properties and pay dividends to shareholders. While the housing market faces uncertainty, Wall Street still sees a big upside in these residential REITs.

Mid-America Apartment Communities Inc. MAA: Mid-America Apartment Communities is a REIT primarily focusing on apartment communities in the high-growth Sun Belt region of the U.S. At the end of the first quarter, it had ownership interest in 101,986 apartment units, including communities currently under development. With a quarterly dividend rate of $1.40 per share, the REIT offers an annual yield of 3.6%. Goldman Sachs analyst Chandni Luthra has a Buy rating on Mid-America and a price target of $180. Because shares trade at $153.25 today, the price target implies a potential upside of 17%.

AvalonBay Communities Inc. AVB: AvalonBay Communities is an apartment REIT that focuses on metropolitan areas in regions it believes are characterized by growing employment in high-wage sectors and lower housing affordability. These regions include New England, the New York/New Jersey metro area, the Mid Atlantic, the Pacific Northwest and Northern and Southern California. The stock has surged 17% year to date and Truist Securities analyst Michael Lewis sees more upside on the horizon. The analyst has a Buy rating on AvalonBay and a price target of $211 — around 11% above where the stock sits today. AvalonBay offers an annual dividend yield of 3.5%.

Camden Property Trust CPT: Camden Property Trust owns, manages, develops and acquires multifamily apartment communities. As of April 30, its portfolio consisted of 172 properties totaling 58,702 apartment homes. The REIT pays quarterly dividends of $1 per share, translating to an annual yield of 3.6%. Barclays analyst Anthony Powell has an Overweight rating on Camden and a price target of $137, implying a potential upside of 22%.

Income investors are drawn to REITs because they are some of the higher-yielding names in the stock market. But remember, publicly traded REITs — including those that focus on apartment buildings — are still subject to the stock market’s ups and downs. If you don’t like the volatility associated with publicly traded REITs, there are options to invest in rental properties with as little as $100 through the private market.

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