We recently compiled a list of the 10 Cheap REITs with Huge Upside. In this article, we are going to take a look at where Redwood Trust, Inc. (NYSE:RWT) stands against the other Cheap REITs with Huge Upside.
How is the US Real Estate Market Unfolding?
In the week ending October 24, the average rate on a standard, 30-year fixed mortgage was 6.54%, hitting its highest level since early August. Previously, the mortgage rates dropped to their lowest since early February 2023 after the Fed made its first big rate cut. However, home buying activity hasn’t accelerated as such. Sales of previously owned homes accounting for the majority of the market declined 1% in September from the preceding month. On the contrary, new home sales rose 4.1% in September.
While the slow demand could be attributed to lower rates coming too late for many homebuyers as they tend to buy and sell homes in the spring season, some are hoping for the rates to fall even lower as they look forward to the Fed’s upcoming rate cuts. At the same time, a chronic shortage of inventory is harming the market, with home prices rising in September for the 15th consecutive month.
On October 25, Robert Reffkin, Compass CEO, appeared on CNBC to discuss the housing market. He mentioned that the mortgage rates although on the rise, are a lot better than what they were one year ago at 8.2%. Since consumers react more to the change in the mortgage rate than the absolute rate itself, pending home sales are up 10% year-over-year.
In another interview with CNBC, Alan Ratner, Zelman & Associates managing director, emphasized that the rise in the mortgage rates is the equivalent of a 6% increase in home payment prices. While the resale home market remains constrained due to a lack of inventory, the new home market is showing solid activity. In the prevailing conditions, builders have a competitive advantage over the resale market as they are buying mortgage rates down. However, rate buydowns and other incentives are pressuring gross margins while the opportunity to raise prices or lower incentives to drive the margin back up remains low amidst severe affordability issues.
Is the Commercial Real Estate Sector Recovering?
Lower interest rates are expected to benefit rate-sensitive sectors such as commercial real estate by bringing positive momentum. According to Wells Fargo analysts, the Fed’s shift in policy is the most notable green shoot for the commercial real estate market. Additionally, Alan Todd, head of commercial mortgage-backed security strategy at Bank of America, deems the primary impact of interest rate cuts psychological. Hence, a sense of stability would enable borrowers to get off the sideline and start to transact as the Fed continues its rate cutting.
On September 23, Willy Walker, Walker & Dunlop chairman and CEO, joined CNBC’s ‘Squawk on the Street’. He mentioned how the refinancing and sales volumes are picking up as the sentiment around commercial real estate improves. Furthermore, the second quarter of 2024 witnessed the overall transaction volumes recording their first quarterly increase since 2022. Over $40 billion in transactions took place in the quarter which marked a 13.9% quarter-over-quarter increase.
The multifamily sector is demonstrating strength as well with net absorption totaling 126,600 units in Q2, the sixth-highest Q2 total in more than 20 years. Additionally, the overall multifamily vacancy rate remained unchanged at 5.5% in the quarter after two years of quarterly increases. With demand outpacing new deliveries, the vacancy rate should start to fall toward its long-run average of 5% in subsequent quarters as reported by CBRE.
While the aforementioned dynamics seem to lay the foundation for commercial real estate recovery, the office sector still remains stressed and plagued with challenges. Although the sector has shown some improvement in Q2 with the office net absorption turning positive for the first time since 2022, problems such as rising vacancies and supply outpacing demand continue to persist. Hence, the office sector despite showing some progress, still has a long way to go.
Our Methodology
In order to compile a list of the 10 cheap REITs with huge upside, we first used Yahoo stock screener to find a list of REITs with a forward P/E under 15. We then selected the 10 stocks that had the highest upside potential. The 10 cheap REITs with huge upside are arranged in ascending order of their average upside potential, as of October 24.
At Insider Monkey we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Redwood Trust, Inc. (NYSE:RWT)
Average Upside Potential: 12.12%
Forward P/E: 8.60
Number of Hedge Funds: 11
Redwood Trust, Inc. (NYSE:RWT) is a specialty finance company that has been enabling access to housing opportunities for American homebuyers and renters since 1994. The firm invests in mortgages for single-family and rental properties. Additionally, the firm acquires, sells, and securitizes residential loans and offers a steady source of liquidity to the owner-occupied and rental markets.
Redwood Trust, Inc. (NYSE:RWT) boasts a robust and organically grown investment portfolio. This portfolio comprises investments sourced organically through the Residential and Business Purpose Mortgage Banking operating businesses, and through other partnerships and third parties. The firm’s products serve some of the largest addressable markets in housing finance. Furthermore, Redwood has demonstrated the ability to capture additional market share amidst a changing regulatory environment. Regulatory reform has also been the major market catalyst for housing finance over the past 30 years.
During the second quarter, the REIT reported GAAP net income available to common stockholders of $13.8 million. In Residential Consumer Mortgage Banking, Redwood locked $2.7 billion of loans, up 49% from the first quarter of 2024. In Residential Investor Mortgage Banking, the REIT funded $459 million of loans, up 41% from the first quarter of 2024. In regards to the investment portfolio, the firm deployed almost $133 million of capital into internally sourced and third-party investments marking the largest quarter of deployment since the third quarter of 2022.
Thus, Redwood Trust, Inc. (NYSE:RWT) has a strong mission to make quality housing accessible to all American households. The firm boasts a strong position, unique partnerships driving the path to transformative scale, and a vast total addressable market. In the words of the REIT, to own RWT is to hold the keys to tremendous option value on the future of housing finance.
Overall, RWT ranks 10th on our list of the other Cheap REITs with Huge Upside. While we acknowledge the potential of RWT as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than RWT but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: $30 Trillion Opportunity: 15 Best Humanoid Robot Stocks to Buy According to Morgan Stanley and Jim Cramer Says NVIDIA ‘Has Become A Wasteland’.
Disclosure: None. This article is originally published at Insider Monkey.