Looking for a bargain?
No it's not a bridge. It's a carefully selected single-family home
in Phoenix, or maybe even Atlanta, or another once hard-hit city in
the United States.
Not interested in the hassle of buying a foreclosed home, fixing it
up, and renting it out?
No problem. There are plenty of other ways to play the housing
recovery, and the one I'm about to tell you about is currently
But first, what recovery?
Signs of a housingturnaround are unmistakable. Prices for existing
single-family homes are rising in virtually every region of the
country. According to the Case-Shillerindex -- a popular gauge for
the U.S. housingmarket -- home prices continued to rise in the
third-quarter of 2012.
Existing homes sales are robust. Total existing home sales,
including single family, townhouses, condos and coops, hit a
seasonally adjusted 4.79 million in October 2012. That's nearly 11%
better than the 4.32 million sales in October 2011 and an
improvement of nearly 7.2% over the 4.47 million recorded in July
2012, just four months earlier.
Builder sentiment is also at its highest level since 2006, when the
U.S. housing market peaked. The National Association of Home
BuildersMarket Index surveys builders on current single-family home
sales and their estimates over the next six months. The index
reached 46 in November, compared with 41 in October, and nearly
three times the low of 17 in October 2011. In the past year, it has
strengthened by 27 points.
That's the most dramatic increase in its history.
That's one reason the big players are starting to enter the market.
Typically, buying a second home, fixing it up, and renting it out
has been something done by individuals, not large corporations.
Whilereal estate firms have focused on residential real estate,
they typically specialized in apartment rentals in densely
Not any longer. Major players, such as publically listed
privateequity firms with billions of dollars to invest, have
entered the single-family residential market. Think
KKR & Co. (NYSE:
. I see this trend as their vote of confidence that housing has
bottomed and is undervalued.
At least two key factors have contributed to the big boys moving
First, the glut of recent foreclosures -- 2.8 million in 2009 and
in 2010 and 1.9 million in 2011 -- created an abundant supply of
houses. Government holders, such asFannie Mae andFreddie Mac , are
carrying on bulk sales of these properties. More are in the
pipeline, so large portfolios of single-family homes can be
accumulated quickly and easily by institutionalmoney .
Second, while prices are rising, nationwide they are still down
more than 30% from their 2006 peak. Depending on the region and
neighborhood, some price declines are far more drastic. In parts of
California, for example, houses that were $250,000 at the height of
the boom can now be bought for $100,000.
At these depressed prices, private equity players can still make
aprofit from renting -- after buying, fixing up, and hiring a
property manager to look after maintenance and local operations.
The average anticipated return on the rentals is 7% to 8% a year.
The aim is to hold the properties for a number of years, then sell
into strength, reaping a capital gain.
One of my favorites in this sector is KKR & Co., formerly known
as Kohlberg Kravis Roberts & Co.
The New York-based private equity firm operates internationally
with some 13 offices in Europe, Australia and Asia. It has
completed more than $400 billion private equity transactions since
inception, and as of Sept. 30, 2012, had $66.3 billion in assets
In response to signs of a housing recovery, KKR is making a big
push into real estate. As part of its increased emphasis on real
estateinvestments , in 2011 the firm hired roughly 300 staff with
specialized real estate expertise.
In early 2012, KKR announced its first foray into property
development as it purchased land to develop with partners 330
apartments and 500 single-family, townhouse and duplex homes in
Williston, North Dakota. Williston is strategically located in the
prolific oil and gas Bakken shale formation. The city expects
20,000 wells will be drilled in the next 10 years, adding between
10,000 and 20,000 jobs created. At present, roughly 15,000 oil and
gas workers are in temporary housing.
The company'sdividend payments, which vary withearnings each
quarter, totaled 84 cents per unit in 2012. That gives
thepartnership ayield of 5.7% at today's price ($0.84/$14.70).
That's not to say this stock is without risk. While KKR is
expanding its presence in real estate and single-family housing,
the sector still comprises only a small part of its portfolio.
While KKR'srevenues have expanded,investment income and earnings in
the private equity sector can be volatile.
Action to Take -->
That said, KKR has continued to raise distributions sincegoing
public in 2009, even though 2011 was a weak year. Earnings in 2012
should be strong and a distribution increase could be announced in
the first-quarter of 2013, which may be acatalyst for the share
price to move higher.
Theshares are suitable if you're looking for a high-yield way to
invest in the U.S housing recovery, but if you can also accept the
volatility of the company's earnings stream.
-- Carla Pasternak
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Carla Pasternak does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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