REITs Headed For Trouble as Well, Expert Says

Whether the housing market horror show has come and gone - or still alive and well - is one of the most hotly debated issues on Wall Street.

After Tuesday’s report from the Mortgage Bankers Association about ballooning home mortgage foreclosures and delinquencies, it is hard to accept the hypotheses some economists and money managers are pushing:

• The worst is over
• Housing is now in the process of stabilizing
• Battered home building stocks are among the best buys in the market

Some buy this outlook, but Michael Larson, a Florida investment adviser, says the housing horror show is only in the intermission stage. He cites bulging inventories, rapidly slowing sales, and weakening home prices.

Last April, Larson, associate editor of Safe Money Report, a monthly newsletter out of Jupiter, Fla., said that subprime (bad credit mortgage) lending firms were “indiscriminately lending to anyone who had a pulse.”

At the same time, he recommended the sale of the shares of the industry’s third largest firm, home loan lender New Century Financial. At the time, the shares were trading at around $45. It was a good call; the stock is now under $2.

While Wall Street is heavily focused on the latest debacle, notably any company with exposure to the $1.2 trillion worth of outstanding bad credit home loans, Larson sees another burgeoning risk — apartment real estate investment trusts, notably rental-oriented firms that build, own, and manage apartment complexes.

“They could be a major housing problem, the next big shoe to drop,” he said.

Put another way, real estate investment trusts could be Act II of a bloody housing horror show. But you can’t detect that from the blistering showing of apartment REITs, one of the stock market’s hottest sectors over the past three years.

In this period, many have racked up sizzling gains, including reinvested dividends, of roughly 100-150 percent. That, in turn, drove up the market capitalization of the 19 largest apartment REITs to $65.8 billion as of last month.

But that was yesterday.

Today, Larson observes, REITs face swelling problems, among them increasing supply, rising vacancies, and slowing real estate demand, all of which point to diminishing rental growth.

And he sees rising rental competition from the many speculators who hoped to make fast killings using low-interest mortgages for buying and flipping condominiums, single-family homes, and townhouses.

With the housing market slumping, many flippers, unable to flip, have now resorted to renting, thus putting increased pressure on the rental market.

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