Home Prices Rising: 3 Residential REITs Building Hopes

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As per the Federal Housing Finance Agency report published yesterday, U.S. home prices in July increased 0.6% on a seasonally adjusted basis from June, ahead of the market expectation for a 0.4% increase. On a year-over-year basis, the gain was 5.8%, driven by higher demand and limited supply of properties.

The obvious reaction was a fall in sales the next month. Potential buyers stalled their decisions to own a home in August and waited instead for a price decline. The National Association of Realtors' recent revelation on existing home sales shows a 4.8% drop to an annual rate of 5.31 million units in the month.

The tally fell short of the market forecast of 5.52 million units and the July sales figures that were revised down to a seasonally adjusted 5.58 million. On the other hand, the median price of homes sold was up 4.7% to $228,700 from a year ago. None of the four key regions experienced growth in August sales and the decline was more pronounced in the West and the South, where prices were steeper.

The August decline comes after three consecutive months of gains. It also represents the sharpest drop on a month-to-month basis since January, when home sales digested a decline of 4.9%.

Can Renters Benefit?

Well, renters will surely do. That's because potential buyers will now continue renting until homes are affordable again.

Moreover, the millennial generation - a confident self-sufficient lot in their 20s and 30s - are renting for a prolong period (an average of 6 years before buying their first homes as per a Zillow study). (Read: Housing Starts Peak: 3 REITs to Ride the Wave. )

Though they are moving out from their parents' dwelling early and renting their own pads, they are also paying off a student debt, getting married later and parting with a huge share of their monthly income for rents (30.2% in second-quarter 2015 according to the Zillow study), finally ending up struggling for a mortgage. This cycle, however, keeps the demand for residential units strong.

Now, residential real estate investment trusts (REITs) depend on borrowings for their business and their stocks look attractive when rates are low and Treasury yields fall. But even when the rates eventually rise, that would only point to the strength in the economy and renters with short leasing periods will have the scope to adjust their pricing.

So for residential REITs, if the recent Fed decision to hold a lift-off is the icing on the cake, the cherry on the icing might be the hike, when it comes.

How to Choose the Right Pick?

Amid the current volatility in the stock market, choosing the right stock might be a daunting task. So we looked for stocks that can exploit this volatility and make significant profits. For that we have screened for stocks in this sector with good Momentum Style Score (Momentum Score = 'A' or 'B') that indicates the time to buy a stock to benefit from rising share prices. For a more in-depth understanding, check out our Style Score System .

But as this is a speculative strategy and not meant for the weak-of-hearted, we have paired the momentum score with a Zacks Rank of #1 (Strong Buy) or #2 (Buy), which indicates stocks with high chances of outperforming the market over the next 1-3 months. Since estimate revision is a driving factor for the Zacks Rank, stocks with high ranks as well as high momentum scores have even greater chances of short-term appreciation.

And finally, to offer investors a sort of guard against a possible stock market correction or downfall, we choose dividend payers because these stocks not only offer higher income in the current low-rate environment, they are safe bets as dividends generally act as a hedge against economic uncertainty.

Here are the three stocks that met these criteria:

Camden Property TrustCPT is a self-administered and self-managed REIT that is engaged in the ownership, development, acquisition, management, marketing and disposition of multi-family apartment communities in the Southwest and Mountain regions of the United States. This Zacks Rank #2 stock has a Momentum Score of 'A' and dividend yield of 3.82%.

Silver Bay Realty Trust Corp.SBY is a REIT focused on the acquisition, renovation, leasing and management of single-family properties. Silver Bay Realty Trust Corp. is based in the United States. This Zacks Rank #2 stock, with a dividend yield of 2.90%, has a Momentum Score of 'B.'

Mid-America Apartment Communities Inc.MAA is a REIT which owns and operates apartments. It seeks to acquire and develop apartment communities appealing to middle and upper income residents. This Zacks Rank #2 stock, with a dividend yield of 3.83%, has a Momentum Score of 'A.'

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days . Click to get this free report >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

MID-AMER APT CM (MAA): Free Stock Analysis Report

CAMDEN PPTY TR (CPT): Free Stock Analysis Report

SILVER BAY RLTY (SBY): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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