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Equity Perspectives

While home ownership for most age groups has dropped to 20-year lows, exceptionally strong demand for rental units has triggered a boom in apartment construction.

Mention the state of American housing at a summer barbecue and you’re bound to hear a tale of two countries: one tied to home ownership, the other either attracted to or driven to less-expensive rentals.   

While baby boomers (born 1946–64) , particularly “empty nesters,” and Generation X-ers (born 1965–84) may complain about how long it takes to sell their houses given slack demand, tight credit, and higher income and property taxes, bidding wars have returned in some parts of the country. At the same time, retirees or near-retirees with limited savings are choosing to rent properties instead of owning them.  

On the other hand, millennials (born 1985–2004), often still saddled with college loans and thwarted by meager savings, are flocking en masse to rental buildings closer to their jobs in vibrant cities such as Austin, Charlotte, and Nashville,1 to name a few, making the 2010s on track to become the strongest decade for renter growth in history, according to a recent Harvard University study.

Housing construction numbers for June 2015 underscore that trend: Builders broke ground on apartment and condominium complexes at the fastest pace in nearly 28 years (up 28.6%), while starts for single-family houses slipped 0.9%.3

But millennials are not the only factor. “While soaring demand is often attributed to the millennials’ preference to rent, households aged 45–64, in fact, accounted for about twice the share of renter growth as households under the age of 35,” the Harvard study said. “Similarly, households in the top half of the income distribution, although generally more likely to own, contributed 43% of the growth in renters.”

No wonder the national homeownership rate has dropped to levels not seen since 1993 (see Chart 1), and homeownership for all adult demographics has declined in recent years (see Chart 2).

 

Chart 1. The National Homeownership Rate Has Fallen Back to 1993 Levels
Homeownership rate (%)

Source: Joint Center for Housing Studies of Harvard University (JCHS) tabulations of U.S. Census Bureau, Housing Vacancy Surveys.

 

Chart 2. Homeownership Rates for All Age Groups Have Declined in Recent Years
Change in homeownership rate,1993–2013 (percentage points)

Source: JCHS tabulations of U.S. Census Bureau, Housing Vacancy Surveys.

 

Sure, the rents in metropolises may be exorbitant—New York and Washington, D.C., being prime examples—but renters in such places seem to be willing enough to pony up for smaller quarters in a prime location in return for a more carefree lifestyle. As a result of all that demand, vacancy rates have declined, allowing landlords to raise rents by almost twice the rate of inflation (see Chart 3).

 

Chart 3.  With Vacancy Rates Declining, Rent Increases Continue to Outpace Inflation
Percent change

Source:  U.S. Department of Labor, Bureau of Labor Statistics.

 

Yet, even with the strength of multifamily construction, housing starts remain near historical lows, according to the U.S. Census Bureau (see Chart 4).

 

Chart 4. Even with Multifamily Construction, Housing Starts Remain Near Historical Lows
Construction starts (units in 000s), 1970–2014

Source: U.S. Census Bureau, New Residential Construction data.

 

Against that backdrop, Lord Abbett research analyst Steve Benyik remains optimistic about the potential upside from a housing recovery, but in general prefers names that are best positioned to benefit from improving fundamentals over the near- to intermediate-term. Specifically, with household formation picking up (albeit still at a much lower level than in the 2005 housing bubble; see Chart 5), supply peaking, and previously challenged markets improving, Benyik has been positive on a number of apartment REITs. He also favors a residential real estate broker that stands to benefit from an upturn in existing home sales, mergers and acquisitions, and balance-sheet de-leveraging. And he waxed optimistic about a leading diversified homebuilder with a history of strong core operations, as well as potential upside from ancillary businesses, including multifamily, master-planned communities, and distressed real estate lending.   

 

Chart 5. Household Growth Appears to Be Picking Up
Annual household growth (in millions)

Note: Estimates are four-quarter rolling averages of year-over-year growth.
Source: JCHS tabulations of US Census Bureau, Housing Vacancy Surveys.

 

“The housing recovery may continue to be protracted due to continued first-time buyer challenges, including the greater propensity to rent, but even with the run-up in housing stocks and apartment REITs in the last year (see Chart 6), active managers should still be able to find pockets of opportunity,” Benyik said. 

 

Chart 6. Apartment REITs and Homebuilders Have Outperformed the S&P 500
FTSE NAREIT Equity Apartments Index, the PHLX Housing Sector Index, and the S&P 500—percentage gain, June 2014–June 2015

Source: FactSet.

 

“Submarket Surveillance,” Zelman Associates, July 7, 2015.
Joint Center for Housing Studies of Harvard University, The State of the Nation’s Housing 2015,June 24, 2015.
“Building of Apartments Sends Housing Starts Up,” Associated Press, July 17, 2015.

 

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