19-Year Low in Homeownership Reveals a 129% Profit Opportunity

Homeownership in the United States is at a 19-year low at just 64.4%, according to a recent Census Bureau report. This may sound like a negative, but it is actually fueling an incredible opportunity for traders. 

Rents are on the rise and vacancies are low, allowing a handful of companies that control a large portion of the U.S. rental market to prosper. Today, I’m going to tell you how you can leverage this trend into triple-digit profits in less than five months.

According to real estate research firm Reis, apartment rents have risen for 23 straight quarters, increasing to an average of $1,111 a month in the third quarter. This puts rent prices more than 15% above levels seen at the end of the recession in 2009.

While rates are going up, rental vacancies are near a 14-year low. The rules of supply and demand dictate further acceleration in rents.

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Fueling this trend is steady job growth combined with stricter mortgage qualifications making it harder to get a home. Additionally, with the housing market crash in the not-so-distant past, many would-be buyers are nervous to take the plunge.

For those who do qualify for loans and are ready to buy, the search may be more difficult thanks to investment firms and hedge funds like Blackstone Group (NYSE: BX) gobbling up large chunks of home inventory since 2008, leaving inventories near multiyear lows. 

Then there are interest rates. Fed officials have begun to take a more hawkish view on interest rates as recent GDP numbers came in better than expected. Rising interest rates mean more expensive mortgages and tighter lending standards. 

With all of these factors contributing to a healthy rental market now and for the foreseeable future, apartment real estate investment trusts (REITs) should continue to outperform in 2015. 

REITs trade like stocks, allowing us to invest in portfolios of large-scale properties, and pay out a large amount of their earnings in the form of a dividend.

There are only a handful of publicly traded REITs that have options on them available. Most rental REITs, such as Simon Property Group (NYSE: SPG), Avalonbay Communities (NYSE: AVB) and Vornado Realty Trust (NYSE: VNO), have extremely wide bid-ask spreads in their options, something I typically avoid.

Vanguard REIT ETF (NYSE: VNQ) holds some of the biggest apartment REITs in the country. Its options have good volume and relatively tight bid-ask spreads, making it easy to trade.

VNQ has gained 22% year to date compared with 9% for the S&P 500. I believe demand for rent-related REITs will continue to increase into 2015, and at the very least, match this year’s performance given the factors I outlined above.

VNQ jumped 1.6% Friday with the broad market rally and an earnings beat from one if its holdings, Post Properties (NYSE: PPS). I expect a pullback Monday in the market and VNQ, as both look technically overbought here. 

I’m setting a target of $85 over the next few months, about 8% above current prices and conservative given the ETF’s past performance. That’s not an exceptional return, but using a call option strategy, we can make more than 100% on a move to that level.

VNQ Call Option Trade

Today, I am interested in buying VNQ Mar 74 Calls with a limit price of $4.80. I think we will have a chance to pick up the options for this price if VNQ pulls back Monday. But if shares do not come down by late Monday, you can pay up to $5.40 for the call options.

VNQ Call Option
Risk graph courtesy of tradeMONSTER.

This call option has a delta of 93, which means it will move roughly $0.93 for every dollar that VNQ moves, but it costs a fraction of the price of the stock.

The trade breaks even at $78.80 ($74 strike price plus $4.80 options premium).

If VNQ hits my conservative $85 target, the call option will be worth at least $11. Once you enter the trade, place a good ’til cancelled (GTC) order to sell your calls at that price.

Recommended Trade Setup:

— Buy VNQ Mar 74 Calls at $4.80 or less 
— Set stop-loss at $1.50
— Set price target at $11 for a potential 129% gain in 4.5months 

If you have a question or comment about today’s strategy, please send it to editors@profitabletrading.com.