NAHB Report Says Multifamily Stock Returns May Start to Cool

Washington, D.C.–A new report by the National Association of Home Builders suggests that the high-flying days for multifamily stocks might be drawing to a close. “While predicting future returns of the Multifamily Stock Index (MFSI) and the S&P 500 is impossible, the spread between the dividend yield available on the MFSI and on Treasury securities is informative,” the report explains. “That spread is now suggesting that the MFSI may be peaking.”

NAHB introduced the Multifamily Stock Index in January 2002 to track the performance of public firms specializing in multifamily ownership and management, and to allow comparisons between the MFSI and other major stock indices. To make meaningful historical comparisons, the organization set the starting point of all the firms that qualified for inclusion in the MFSI at Dec. 31, 1998.

Over the past 12.5 years the MFSI has dramatically outperformed the market as a whole, but the MFSI hasn’t been consistent. According to the organization, its MFSI has enjoyed a cumulative return of 330 percent since 1998, even though the index has declined at times. That compares quite favorably to cumulative return of 34 percent from the S&P 500 (including dividends) over the same period.

During certain periods, in fact, the relative performance of the MFSI compared to the S&P 500 has been outstanding. These periods are between March 2000 and September 2002; between August 2004 and January 2007; and between February 2009 and now. During 2007 and 2008, however, the performance of the MFSI slipped, and it posted its first ever back-to-back negative returns and its worst one-year decline in history.

Over the past six months, however, the MFSI and the S&P 500 have both enjoyed strong rates of return, the report notes. The MFSI returned a shade less than 14 percent during that period, while the S&P (with dividends) posted a return of slightly more than 6 percent. Despite numerous shocks to the economy, including an ongoing severe credit crunch, continued house price declines, persistently high unemployment, wild fluctuations in the price of energy and commodities, and a general decline in equity values, the MFSI has held up remarkably well.

Part of the index’s performance clearly has to do with interest rates—in particular, the difference between the interest rate on U.S. Treasuries and the dividend yield available for the MFSI. The dividend yield is defined as the annual dividend per share divided by the price per share. As a result, as share prices rise, dividends yields fall, and visa versa. Over the past decade, the spreads between these two yield measures have changed dramatically and those changes offer potential clues into the future performance of the MFSI.

“At least part of the explanation for the performance of the MFSI is strongly related to the yield spread between the MFSI and the 10-year Treasuries,” the NAHB posits in the report. “When it grows, it acts as a strong headwind, reducing returns; and when it declines, it acts as a tailwind, boosting MFSI performance.”

Over the past 27 months, the report continues, the direction of the spread between the yield on the MFSI and U.S. Treasuries has been very favorable. “But this period may be ending,” it says. “The numbers suggest that the run-up in the MFSI over the past couple of years may be coming to an end, and that close attention to the yield spread is warranted.”