5 Top Housing Stocks to Buy Now

There are a few different ways to invest in housing without actually buying properties. You can invest in real estate investment trusts, or REITs, that focus on residential real estate. You can buy shares in a homebuilder. Or, you could invest in a business that’s related to housing, such as a real estate website or a retailer that sells construction supplies to homebuilders.

However, there are a lot of housing stocks to choose from. Even if we narrow down the search to stocks that trade on major exchanges with market capitalizations greater than $250 million, there are 18 residential REITs, 20 homebuilders, and dozens of companies that are more indirect investments in housing…

To help narrow down the search, here are five housing stocks that look extremely appealing as long-term investments.

Company Type of Business
Home Depot (NYSE:HD) Home-improvement retail
AvalonBay Communities (NYSE:AVB) REIT-apartments
NVR (NYSE:NVR) Homebuilder
Zillow Group (NASDAQ:Z)(NASDAQ:ZG) Real estate website
American Campus Communities(NYSE:ACC) REIT-student housing

DATA SOURCE: CNBC. MARKET CAPITALIZATIONS AS OF 7/11/19.

Home Depot: The biggest (and best) home-improvement retailer

Home Depot is not only the largest home-improvement retailer, but it’s also the largest housing stock of any type, and by a big margin. The only U.S. retailers larger than Home Depot are Amazon.com and Wal-Mart. The company had nearly 2,300 stores in North America and generated $108.2 billion in revenue in 2018. This is a massive company, and is a major source of construction supplies like lumber, tools, and more for homebuilders.

Many investors are afraid to invest in any retail stocks right now, and with the high-profile bankruptcies and store closures involving some once-great retailers, who could blame them? However, Home Depot is different.

For one thing, Home Depot is largely immune to the e-commerce headwinds that have created a nightmare scenario for many retailers. Professional customers (like homebuilders) and everyday consumers generally need to physically look at construction and home-improvement products in person. In other words, if you need to buy 4×8 sheets of plywood, you generally aren’t going to order them online.

Furthermore, Home Depot is doing quite a good job of building out its e-commerce platform and omnichannel capabilities itself. This is true even when compared with competitors — for example, in the fourth quarter of 2018, Home Depot grew online sales by 24% year over year, more than double Lowe’s 11% pace.

Despite its massive size, Home Depot continues to grow sales nicely, and at a time when many retailers have faced years of declining revenue. To sum it up, Home Depot’s massive scale, superior omnichannel approach, and the in-person nature of its business should keep it an outperformer in the retail world for years to come.

AvalonBay Communities: High-value apartment communities and lots of room to grow

Real estate investment trusts are a special type of company. In order to qualify as a REIT, a company needs to invest at least three-fourths of its assets in real estate and related investment, must derive at least three-fourths of its revenue from these investments, and must pay out at least 90% of its taxable income as dividends to shareholders, among other requirements.

As you might expect, REITs typically have above-average dividend yields thanks to this last requirement. They also enjoy special tax treatment — because they pay out virtually all of their taxable income to investors, REITs are not taxed at the corporate level. In contrast, most other companies in the U.S. are subject to corporate tax on their profits, which currently is a flat 21% rate.

Although it’s roughly one-eighth the size of Home Depot, AvalonBay Communities is the largest real estate investment trust, or REIT, focused on residential properties. If you aren’t familiar with its business, AvalonBay develops, acquires, owns, and operates apartment buildings in high-barrier markets in the U.S.

As of March 2019, AvalonBay owns 291 apartment communities, the majority of which are located in its six core markets of New England, New York Metro, Mid-Atlantic, the Pacific Northwest, Northern California, and Southern California. However, the company has recently started to expand into two largely untapped new markets — Southeast Florida (think Miami, Fort Lauderdale, West Palm Beach, and surrounding areas) and the Denver, Colorado metropolitan area.

In a nutshell, the company invests in high-cost markets where homeownership is often prohibitively expensive for many buyers. And these are markets where there is limited supply of rental housing, and with strong job and wage growth and favorable demographic trends.

While it acquires properties as part of its growth strategy, AvalonBay’s preferred method of growth is through development of new properties, which is perhaps my favorite thing about the company. Let’s say that the average apartment building is selling at a 6% capitalization “cap” rate. This means that an apartment property with a market value of $10 million can be expected to produce net income of $600,000 per year. However, if you can build the same property for $8 million, your annual return will be a far more attractive 7.5%. Plus, you will have created $2 million in equity for your investors.

AvalonBay invests heavily in development, having spent a total $2.4 billion during 2017 and 2018 alone. The company estimates that development activity by itself has created $26 per share in net asset value in this manner since 2011, so it’s no wonder it sees development as a priority.

The company’s strategy seems to be paying off. From its 1993 IPO through early July 2019, AvalonBay generated 3,110% total returns for shareholders (as compared with 960% for the S&P 500) and has increased its dividend at a 5.2% annualized rate during that time. To put this into perspective, this means that a $10,000 investment in AvalonBay’s IPO 26 years ago would be worth more than $310,000 today…

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