How to Profit from First-Time Home Buyers Turned Renters
The road to home ownership in America may have been paved with good intentions, but the current housing market recovery shows it’s not leading to Oz. Even though home values are on the rise, U.S. home ownership, at 65%, is at its lowest level in 18 years—and for some, that’s still too high.
Since the real estate market bubble burst in 2007, a number of riskier borrowers have been squeezed out. At the same time, there are a lot of potential first-time home buyers unable to take advantage of near-record-low borrowing costs and get into the housing market because banks are wary of lending. And for a sustained housing market to take hold, first-time home buyers need to be able to actually access the housing market.
In fact, the so-called “housing market recovery” isn’t really benefiting those Washington has been pushing for. Thanks to tax credits that were made available when the Great Recession began, first-time buyers accounted for more than 50% of U.S. housing market sales as of 2009. That’s a substantial increase over the 30-year average of 40%.
The U.S. housing market has experienced some major changes since then. Today, first-time home buyers account for just 29% of sales. One could argue that first-time home buyers, typically in their 20s and 30s, don’t have enough credit history to get a mortgage. And because of stagnant wages and mile-high unemployment, they haven’t had time to build up a nest egg. After being bailed out by tax payers, banks are no longer willing to lend to those they believe are untrustworthy.
So while affordability in the U.S. housing market is near a record, the average American is facing a tight mortgage market and rising bank interest rates—not the best recipe for a U.S. housing market rebound. It is, however, the perfect scenario for both investors who weathered the Great Recession and private equity firms looking to make money, either by flipping houses or managing single-family homes to rent.
During the first half of 2013, single-family home flipping increased 19% year-over-year and soared 74% over the first half of 2011. Not surprisingly, median U.S. home prices rose 13.5% year-over-year in June, with one in three properties being purchased with cash. (Source: “Single Family Home Flipping Increases 19 percent in first half of 2013 While Profits Soar,” RealtyTrac, July 19, 2013.)
At the same time, the U.S. rental vacancy rate is at its lowest level since the first quarter of 2001, at 8.2%. The median asking price for rent, meanwhile, has increased to a record $735.00 per month. With unemployment remaining stubbornly high, U.S. home ownership and rental vacancies could dip even lower. (Source: “U.S. homeownership slips to 17-1/2-year low,” Reuters, July 30, 2013.)
For investors looking to take advantage of the housing market, they could consider adding a U.S. housing real estate investment trust (REIT) to their portfolio. That’s because there are around 14 million for-lease houses in the country. With an industry value at $2.8 trillion, the U.S housing market is still 25% below its 2006 peak. (Source: Gittelsohn, J. and Callanan, N., “Hughes’s American Homes 4 Rent Seeks $794 Million in IPO,” Bloomberg, July 19, 2013.)
The Blackstone Group L.P. (NYSE/BX) has invested more than $5.0 billion in 30,000 rental homes, creating the largest U.S. single-family home rental venture. There are also a large number of people who can’t qualify to buy a home or don’t want to own a property who are more than happy to rent an apartment. Apartment Investment and Management Company (NYSE/AIV) has one of the largest portfolios of apartment properties in the U.S.
A strong economy and strong earnings are a prerequisite to home ownership. Those elements aren’t in place, and until they are, U.S. housing REITs will continue to offer investors an opportunity to diversify their investment portfolio.