U.S. Home Prices Are at Record Highs: 1 Growth Stock to Buy Now

The median sales prices of existing homes in the U.S. surpassed $400,000 for the first time in May. That marks a record-breaking 123 consecutive months in which existing home prices have increased on a year-over-year basis, and the situation may not improve anytime soon. National Association of Realtors (NAR) Chief Economist Lawrence Yun recently said inventory levels would need to “almost double” to cool home price appreciation.

Not surprisingly, some of that demand is spilling over into multifamily units (i.e., apartments), and multifamily housing starts are expected to rise 26% this year. That could be a catalyst for Walker & Dunlop (NYSE: WD).

Here’s why the stock is worth buying right now.

A strong competitive position

Walker & Dunlop brands itself as the largest provider of capital to the U.S. multifamily housing industry, and the fourth-largest commercial real estate lender across all property types. Better yet, the company typically bears little risk of loss from its lending business. The vast majority of its servicing portfolio comes from loans extended through agency programs, meaning they are guaranteed by government-sponsored enterprises like Fannie Mae and Freddie Mac, or they are insured by the Department of Housing and Urban Development.

Walker & Dunlop breaks its operations into two segments: capital markets and servicing and asset management. Through its capital markets segment, the company originates loans (primarily in the multifamily housing space), and it provides debt brokerage and property sales services. Likewise, through its servicing and asset management segment, the company services many of the loans it originates, and it provides housing market research and asset management services.

Financially, Walker & Dunlop is growing at a steady clip. Revenue increased 26% to $1.4 billion over the past year, and GAAP (generally accepted accounting principles) earnings rose 6% to $8.48 per diluted share. But shareholders have good reason to believe the company can maintain or even accelerate its growth in the coming years.

A large market opportunity

Record home prices and low inventory have created a need for affordable multifamily housing in the U.S., and that plays right into Walker & Dunlop’s wheelhouse. As noted earlier, NAR is forecasting a sizable uptick in multifamily housing starts this year. That should translate into higher lending volume for Walker & Dunlop, which means more revenue from loan origination and servicing fees.

As a caveat, the Federal Reserve is raising interest rates aggressively to tackle rampant inflation. As a result, the 30-year fixed mortgage has already climbed to 5.8%, up from 3.1% at the end of last year. Rising rates may dissuade real estate operators from refinancing loans, which would be a headwind for Walker & Dunlop. However, rising rates may also cause would-be homebuyers to leave the market, potentially adding to the demand for multifamily housing.

Additionally, multifamily loan maturities are expected to grow at 21% annually over the next four years. Management believes that creates a significant refinancing opportunity for the company.

On a related topic, Walker & Dunlop further strengthened its affordable housing platform with its acquisition of Alliant Capital last December. Alliant specializes in low-income housing tax credit (LIHTC) syndication, meaning it connects institutional investors with developers to fund housing projects that will generate tax credits. By acquiring Alliant, Walker & Dunlop joined forces with the sixth-largest LIHTC syndicator in the U.S., causing its assets under management to skyrocket eightfold to $16 billion. Going forward, the current housing environment should be a tailwind for Walker & Dunlop’s affordable housing-focused asset-management business.

More broadly, commercial real estate loans totaled $900 billion in 2021, with $470 billion of that total coming from the multifamily industry. But Walker & Dunlop captured just 9% market share in multifamily originations and 1.6% market share in non-multifamily originations. That means the company has plenty of room to grow. That’s why this under-the-radar growth stock is a smart buy right now, especially with U.S. home prices at record highs.

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Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Walker & Dunlop. The Motley Fool recommends Walker & Dunlop, Inc. The Motley Fool has a disclosure policy.

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