In this piece, we will take a look at the ten best residential real estate stocks to buy. If you want to skip our analysis of the real estate industry, head on over to 5 Best Residential Real Estate Stocks To Buy.
The real estate industry is one of the most crucial sectors in today's high rate environment. Along with banks, real estate firms are ones that are particularly sensitive to interest rate hikes since higher rates reduce consumer appetite for mortgages and make it costlier to finance new construction projects.
Potential trouble in the industry also threatens the economy as a whole since real estate accounts for significant consumer spending and creates employment for thousands of people. The industry is also one of the most valuable in the world, with a research report suggesting that the global real estate market was worth a whopping $3.69 trillion in 2021 and it is slated to grow at a compounded annual growth rate (CAGR) of 5.2% by 2030 to be worth $5.85 trillion. Due to heavy spending in the area, the commercial real estate segment is the most valuable component of the real estate industry, but spending on properties such as villas is expected to grow faster than the broader market through a CAGR of 6.1%. If you're interested in the commercial real estate market and want to know about some top stocks, be sure to check out 10 Best Commercial Real Estate Stocks To Buy According To Hedge Funds. Not to mention, the massive size of the industry also makes real estate firms some of the most valuable in the world. Our research covering the most valuable real estate companies in the world shows that the top three firms are Prologis, Inc. (NYSE:PLD), Blackstone Inc. (NYSE:BX), and American Tower Corporation (NYSE:AMT).
Shifting our focus on America, properties in the U.S. are estimated to be worth $20 trillion but values slumped in March as spending in the segment slowed down. The rapid interest rate hikes have hit the commercial real estate industry quite hard. Prices have dropped to multi decade lows this year, with towers costing less than plots of land would have before - with some buildings in New York being less in worth than the land that they are sitting on. Property dealers are also being forced to hand back buildings to lenders, and as a whole, office buildings in New York have been estimated to have lost $76 billion in value.
Moving to residential real estate, while its woes might be lesser than the commercial side of things, nevertheless, the market has felt its fair share of shocks. The biggest example of this is Fortune Magazine's latest release of its Fortune 500 list in June. This list saw four firms, namely Rocket Companies, Inc. (NYSE:RKT), Zillow Group, Inc. (NASDAQ:Z), Anywhere Real Estate Inc. (NYSE:HOUS), and Compass, Inc. (NYSE:COMP) fail to make it this time around - indicating just how severely the sector has been hit. Not to mention, shares of the residential real estate firm Opendoor Technologies (NASDAQ:OPEN) are down to just $4.28 from a peak of $34.59 in February 2021 in the wake of a disastrous series of bets in plummeting real estate market.
This devastation has happened as new home prices dropped by 10% from their peak levels in February 2023. U.S. home prices as measured by the Case-Shiller Index show that from a peak index level of 308 in June 2022, the index bottomed out of 292.7 in January 2023 and posted a small recovery of 293 in February 2023. However, there seems to be a recovery in the making, as since February, the prices are on an upward trend with the latest reading of April 2023, the Case-Shiller index standing at 301.46.
The upward trend is supported by a slew of metrics. For instance, the Atlanta Fed's GDP Now tracker for the second quarter showed that the residential real estate sector added 0.1% to the economy as measured on June 20th. Analysts believe that a reduction in supply constraints has enabled coronavirus backlogs to clear out, but worries persist that if interest rates continue to rise, then fresh demand could lag and disincentivize home builders from making new houses. Adding to this is the National Association of Home Builders/Wells Fargo's regional housing index. Its latest reading for June added a sixth month of consecutive growth, with the metric sitting at 55. Within the index, the home index in the U.S. South is leading the charge, with single family home sales for the next six months also showing significant growth.
As to what residential real estate companies are thinking, here is what the management of Toll Brothers, Inc. (NYSE:TOL) shared during its latest earnings call:
Beginning in the first week of January, demand has picked up beyond the normal seasonality that we typically see at the start of the spring selling season and has continued into February. We’ve seen demand improve in most markets across the country, including Florida, Atlanta, South Carolina, Charlotte, D.C. Metro, Pennsylvania, New Jersey, Texas Colorado and Southern California. Over the past few weeks, we have also seen signs that demand is improving in markets that struggled the most in the second half of 2022, such as Boise, Phoenix, Reno, Las Vegas and Austin. We attribute the increase in demand to improve buyer sentiment as inflation appears to be receding and the overall economic outlook seems to be more stable than it was a few months ago.
With these details in mind, let's take a look at some great residential real estate stocks to buy according to hedge fund sentiment, out of which the top picks are D.R. Horton, Inc. (NYSE:DHI), Lennar Corporation (NYSE:LEN), and NVR, Inc. (NYSE:NVR).
To compile our list of the best residential real estate stocks, we first made a list of the top forty residential construction and REIT firms ranked by market capitalization. Then, the number of hedge fund investors that had invested in them as of Q1 2023 was determined out of which the top ten residential real estate stocks are as follows.
Camden Property Trust (NYSE:CPT) is a residential real estate trust that manages apartment buildings. The firm's occupancy and new lease rates increased in May, with effective renewal rates sitting around 7%.
Insider Monkey's March quarter of 2023 survey covering 943 hedge funds revealed that 29 had invested in the REIT. Out of these, Camden Property Trust (NYSE:CPT)'s largest shareholder is John Khoury's Long Pond Capital with a $147 million investment.
Along with Lennar Corporation (NYSE:LEN), D.R. Horton, Inc. (NYSE:DHI), and NVR, Inc. (NYSE:te NVR),Camden Property Trust (NYSE:CPT) is a top residential real estate stock.
M/I Homes, Inc. (NYSE:MHO) is a residential construction company based in Ohio. It builds single family homes in several American states. The firm's shareholders were in for a nice surprise in June when the price hit a 52 week high.
By the end of this year's first quarter, 29 of the 943 hedge funds polled by Insider Monkey had bought M/I Homes, Inc. (NYSE:MHO)'s shares. The firm's largest investor in our database is Peter Rathjens, Bruce Clarke, and John Campbell's Arrowstreet Capital through owning 700,737 shares that are worth $44 million.
KB Home (NYSE:KBH) builds and sells a variety of residential properties such as townhomes, condominiums, and single family homes. The firm opened a new community of homes in North Carolina in June 2023, with prices starting from nearly half a million dollars.
29 of the 943 hedge funds part of Insider Monkey's Q1 2023 study covering 943 hedge funds had invested in the residential construction company. Ken Fisher's Fisher Asset Management is KB Home (NYSE:KBH)'s biggest hedge fund shareholder through a stake worth $110 million.
Taylor Morrison Home Corporation (NYSE:TMHC) builds and sells family homes and also plans communities. Out of the last six analyst notes covering its shares, two maintained the rating at Outperform while others ranged from Hold to Sector Perform.
As of the end of March 2023, 29 of the 943 hedge funds part of Insider Monkey's database had bought Taylor Morrison Home Corporation (NYSE:TMHC)'s shares. The firm's largest investor out of these is Cliff Asness' AQR Capital Management since it has a $77 million investment.
Meritage Homes Corporation (NYSE:MTH) operates in the single family home building market of Texas, the Carolinas, and other U.S. states. The firm has an average share price target of $152.86.
31 of the 943 hedge funds surveyed by Insider Monkey for their first quarter of 2023 shareholdings had invested in the firm. Meritage Homes Corporation (NYSE:MTH)'s biggest shareholder is Ken Fisher's Fisher Asset Management since it owns 1.1 million shares that are worth $128 million.
D.R. Horton, Inc. (NYSE:DHI), Meritage Homes Corporation (NYSE:MTH), Lennar Corporation (NYSE:LEN), and NVR, Inc. (NYSE:NVR) are some best residential real estate stocks to buy.
