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Where to invest in housing: Rent or own?

The U.S. home ownership rate is now at its lowest point in nearly half a century, which has investors asking if that’s by default or choice?

Certainly the recent recession has left fewer young Americans in a position to afford home ownership, but the argument is equally strong that young millennials, as well as downsizing baby boomers, prefer the financial and physical flexibility of renting.


So which is the better bet: stocks of the nation’s homebuilders or stocks of multifamily real estate investment trusts (REITs)?

Single-family home construction is still well below historical norms, but multifamily apartment construction is soaring. It begs the question, why are the stocks of single-family builders faring better than REITs, and are investors missing the boat?

Comparing year-to-date, stocks of big builders like Lennar up 16 percent, DR Horton up 16 percent and Toll Brothers up 13 percent, are arguably beating those of REITs like Avalon Bay up 5 percent, Equity Residential up 3 percent and Essex Property Trust up 8 percent.

Strong growth in apartment construction in the past three years has had investors nervous that the nation is on the verge of an oversupply of units, which could lead to lower occupancy and lower rents. Rents and occupancies are currently hovering at historic highs. There is a strong argument, however, that multifamily construction was next to nothing during the housing boom, and these new units are making up for that pent-up demand.

“Apartments have gotten a second wind,” said Alexander Goldfarb, a REIT analyst with Sandler O’Neill. “Fundamentals are likely to remain elevated for the next few years.”

Apartment REITs that reported earnings this week outpaced expectations, even those of their own CEOs.

“Our results for the second quarter and year to date exceeded our original outlook. For the balance of the year, we expect accelerating apartment demand to support stronger performance across our business,” AvalonBay Chairman and CEO Tim Naughton said in the company’s earning’s release.

On the flip side, some investors believe the nation’s homebuilders are well positioned for a long road of growth. Housing supply is incredibly low on the new and existing side, given population growth. Still, the homebuilder market seems a bit stickier and more dependent on location and price. Builder earnings out this week showed some weakness in new orders, prompting some to question if higher mortgage rates and higher home prices in general might be taking their toll on buyers.

“Among builders, DR Horton is taking market share hand over fist, andWCI is crushing it with active-adult product in Florida,” said Buck Horne, a builder analyst with Raymond James. “But then you have some builders that are stagnant in a saturated move-up market, like Pulte and Ryland.

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