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Is Housing's Hiccup Good for Landlords?

26 July 2013 in Trading Ideas

Not so fast with the full-blown housing recovery.

According to a report this past Monday from the National Association of Realtors, sales of previously owned homes fell unexpectedly in June, dropping 1.2% to an annualized rate of 5.08 million homes. A Bloomberg survey of analysts has expected, on average, a rate of 5.26 million homes.1

The realtor trade group said the numbers were hurt by a lack of supply and rising mortgage rates.

The inherent irony, at first glance, is that the very rise in home prices that have helped many homeowners regain their financial footing is now at risk of limiting further gains in the housing market. The realtor group’s economist, Lawrence Yun, said the shortage of housing inventory was particularly acute at lower price points, as price increases push homes out of the reach of the first-time buyer.

That begs the question of what these nonbuyers are doing instead. In effect, they have two choices: renting, or extending their cohabitation with parents before they even contemplate forming their own households.

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The recent housing crisis caused a rise in renters at the expense of home ownership. The growth in housing foreclosures forced many to turn to rental properties, while tighter credit also forced many would-be buyers to rent.

With the housing recovery proceeding, however, many analysts predicted home ownership rates would again rise.

But Bank of America analyst Michelle Meyer sees a more lasting change in the renting-buying dynamic. Meyer said that while many newly created households will be buyers, “a good portion will also be renters, given the challenges facing the youth population in terms of student debt and access to credit.”2

Meyer also expects further upside for apartment construction and rental inflation. Increasing demand for rent will also be met with supply of single-family rental homes. Currently, 30% of renters live in single-family homes, according to Meyer.

renter nation motif

Those expectations, if true, could prove beneficial for stocks of residential community providers. Our Renter Nation motif has gained 8.2% over the past month, and 5.5% in 2013. During those same periods, the S&P 500 has increased 7.9% and 17.2%, respectively.

Then there’s the pesky issue of household formation overall. As economist Jed Kolko noted this week on the blog of online real estate provider Trulia, household formation appears to be lagging the overall housing recovery. According to Trulia’s analysis, the number of “missing” households, i.e. households that would have otherwise been expected to have started, now total 2.4 million – that’s equivalent to more than two years of normal household formation.3

More kids living at home is certainly part of it: the share of 18-to-34-year-olds living with their parents in 2013 remains at 31%, which is where it rose to (from 27%) before the housing crisis. Of course, that elevated level can is hamper theo potential growth in new home buying and rentals.

However, Kolko adds that if and when we do see more young adults move out, we should expect a surge in demand for homes, especially in the for rental markets.

1Alexandria Baca, “Sales of Existing Homes in US Unexpectedly Decline,” Bloomberg.com, July 22, 2013, http://www.bloomberg.com/news/2013-07-22/sales-of-existing-homes-in-u-s-unexpectedly-decline.html.

2Shanthi, Bharatwaj, “Americans Will Still Rent Despite Housing Recovery: BofA Merrill Lynch,” TheStreet.com, June 21, 2013, http://www.thestreet.com/story/11957918/1/americans-will-still-rent-despite-housing-recovery-bofa-merrill-lynch.html?puc=yahoo&cm_ven=YAHOO, (accessed July 23, 2013).

3Jed Kolko, “Sorry, Mom and Dad, The Kids Aren’t Moving Out Yet,” Trulia Trends blog, July 23, 2013, http://trends.truliablog.com/2013/07/kids-arent-moving-out-yet/.