NexPoint Residential Trust Inc. (NXRT)

[Enterprising Investor]

Rental Demand Supplies Home-Building Opportunity (7/28/15)

A tight market is pushing rents higher, but new supply is on the way.

When supply is tight, prices rise, but when prices rise, more supply eventually comes along. This is true of commodities like pork bellies and oil. It also is true of apartments. And that is good news for shares of home builders.

Right now, the rental market is extremely tight. While an improving labor market has encouraged more people to set out on their own, limited mortgage availability has made it hard to buy. The Commerce Department on Tuesday reported that the rental vacancy rate—the share of rental units that are unoccupied—fell to 6.8%. in the second quarter from 7.1% in the first quarter, taking it to its lowest level since 1985.

The dearth of rentals has been pushing up rents, with the Labor Department reporting a jump of 3.5% in June versus a year ago. The increases in hot markets like San Francisco and New York City are, of course, far greater.

At a time when few investments offer much in the way of income, rising rents have helped make the landlording business more attractive. In turn, the price for rental units has risen. In the first quarter, the Federal Reserve’s index of multifamily apartment prices was 11% higher than a year earlier, and 20% above its 2007 peak.

But before reckoning that this situation makes for an opportune time to buy into residential real-estate investment trusts, or load up on rental units, investors should take a look at what is happening with supply.

There has been a flurry of apartment building lately that looks as if it will only get more heated. In June, ground was broken on the most multifamily-housing units since 1986. Meanwhile, the number of permits issued for units that construction hasn’t been started on yet also has swelled.

Banks have eased lending standards and as of mid-July had a seasonally adjusted $1.7 trillion in commercial real-estate loans outstanding. That is up 9% from a year earlier. Moreover, the housing market looks as if it is loosening up; this year’s spring selling season was the best since 2007. So many renters may soon become owners.

So the better asset than apartments right now might be the shares of companies in the business of putting up new apartments and homes. And while home-building stocks have had a good run, their average price to forward earnings multiple is about one-fifth below their five-year average.

If supply is what prices say the market craves, somebody has to build it.

http://www.wsj.com/articles/rental-demand-supplies-home-building-opportunity-1438110055