The housing market is complex, impacted by supply and demand, interest rates, and new home construction, among many other things. If you aren't actually trying to buy or sell a home, it can be an easy sector to ignore. But with expectations that the current housing shortage is going to persist for some time, it might be worthwhile to consider some investment options in the sector.
Here are a few that will let you ignore the complexities by "hiring" a company's management team to deal with them.
Right in the middle of it
The most direct way that people can get exposure to the housing market (besides buying property themselves) is to invest in a real estate investment trust (REIT) like American Homes 4 Rent (AMH 1.82%). This REIT owns and leases out single-family homes. It was created in the aftermath of the Great Recession, which was triggered by a steep downturn in home prices. Essentially, the REIT was able to take advantage of that environment to snap up a lot of properties at good prices that were clustered in close proximity to each other.
Today, it owns roughly 59,000 single-family homes in the Southeast, Midwest, Southwest, and Mountain West. Investors in the REIT benefit from both home price appreciation and rising rental rates. Its shares are as close as you can get to owning a rental property without having to deal with the hassles of, well, owning a rental property. Its dividend yield, however, is fairly modest at 2.4%. That said, yields in the housing space tend to be fairly low overall.
If you don't like the idea of investing in single-family homes, then you could look at an apartment REIT like AvalonBay Communities (AVB 0.07%). It's an industry bellwether with a portfolio of 295 apartment communities containing roughly 88,800 units across 12 states. It has 19 communities under development and one that is being redeveloped. That said, while ground-up construction is clearly a key focus today, AvalonBay has a history of deftly shifting between buying and building assets to grow its portfolio over time. With housing inventory tight, renting an apartment is the best option for many people, and REITs like this one are there to help. AvalonBay's yield is around 3.4% today.
Getting more direct
REITs that own rental properties aren't the only option for investors looking to capitalize on the housing shortage, though. You can also buy a homebuilder like DH Horton (DHI 0.78%).
What's interesting about homebuilders in the current market is they have the financial capacity and the mindset to adapt more quickly to changing conditions. For example, homeowners looking to sell tend to be reluctant to lower their asking prices in response to rising mortgage rates, but homebuilders realize that the only way to move their inventory is to adjust to higher rates by doing just that.
DH Horton has built more than 1 million homes over the past 45 years, so it knows a thing or two about the home construction business. As Donald R. Horton, chairman of the board, said in the company's second-quarter earnings release: "The spring selling season is off to an encouraging start with our net sales orders increasing 73% sequentially from the first quarter. Despite higher mortgage rates and inflationary pressures, demand improved during the quarter due to normal seasonal factors, coupled with our use of incentives and pricing adjustments to adapt to changing market conditions." (emphasis added)
Yes, the company's financial performance will wax and wane along with the housing market, but letting an experienced management team like the one at DH Horton handle your housing sector investments is likely to be a lot less stressful than trying to build or flip a house yourself.
If you want to get even deeper into the construction process, however, you could consider a timber REIT like Weyerhaeuser (WY -1.30%). The company owns vast acreage of timberlands, but it also has a sizable business that converts those trees into the lumber that goes into building homes. The timber business is pretty boring and consistent over time, while the lumber side of things can get exciting and really boost results when there are supply and demand imbalances. Weyerhaeuser is not an investment for the faint of heart.
That said, the REIT has adopted a variable dividend policy that rewards investors with higher payouts when results are strong. Of course, they also share the pain via lower dividends when results are weak. The big driver of any volatility with this REIT will likely be the housing-tied lumber business. The stock's yield now is around 2.2%, but that will change along with the share price and the variable dividend.
Different ways to play
So even in this complex sector, you can still profit from the housing market by investing in companies that have histories of successfully navigating it. Landlords like American Homes 4 Rent and AvalonBay provide direct access to rental properties. DH Horton is an example of a dominant homebuilder, a group that is used to adapting to market conditions to foster long-term success. And Weyerhaeuser is a timber REIT with material exposure to the housing market through its lumber operations -- investors can ride the ups and downs of the housing market via this REIT's variable dividend.