Time magazine has a new article on changes in the home ownership in America. The article, titled A Nation of Renters: Should We Be Worried That Fewer Americans Own Homes?, explores the substantial decline in the fraction of Americans who own their own homes. I have followed this issue for quite some time and the implications for investors may be substantial.
The Time article explores the major elements of this shift. First, lending standards have tightened after gradually loosening in the decade up to the real estate crash. Lack of lending standards appears to have been a major player in driving the real estate market to ridiculous extremes. Lenders had little incentive to ensure that borrowers would actually repay their loans because the lenders simply packaged up bundles of mortgages and sold them to investors, rather than retaining the loans on their own books. In addition, potential first-time homebuyers are often fairly recent college graduates who are facing a tough job market and historically high college debt. These people are less likely than luckier generational cohorts to buy homes.
I am not going to weigh in on the debate as to policy issues, but rather explore some of the investment implications of having fewer owner-occupied homes.
First, this shift is not good news for businesses that sell home improvement products and services direct to individuals. Companies like Home Depot (HD) and Lowes (LOW) will take a hit if people spend less money on landscaping and a range of do-it-yourself upgrades. I doubt that people will spend the same time and effort on the yards of houses they are renting as compared to those that they own. It also seems to me that renters will spend less money on a range of interior products such as furnishings for houses they rent. Who will buy nicer drapes for a rental? I see companies like Bed, Bath and Beyond (BBBY) suffering and companies like IKEA benefiting here. IKEA products are famously easy to disassemble and move. The broader market for upscale interiors is also likely to experience a malaise. I seriously doubt that many property management firms will be adding granite countertops or Viking appliances in rental houses.
Renters should be investing more heavily than homeowners precisely because they don’t have homes that they can treat as a source of retirement assets. I know many people who, during the real estate bubble, splurged on their homes and home improvements with the rationale that they were ‘investing’ in their homes and that this would be a potential source of retirement funds in the future. Though this rationale was weak, I believe that it was a key driver to justify expensive home improvement projects. Even for more conservative homeowners, a house is an asset that can be sold if need be. Where will the growing population of renters put their extra cash? One possibility is that they will spend more money on discretionary items such as automobiles or vacations. A more hopeful scenario is that they will save more in retirement accounts and in other taxable investment accounts. In a perfect world, the new generation renters will seek out investments that do a good job of keeping up with inflation. Home owners are or have pre-paid for future cost of shelter. Renters remain exposed to inflation in housing costs.
A large-scale shift from home ownership to renting has led to the emergence of a new sub-asset class: publicly-traded firms that manage large numbers of single-family homes as rentals. One business model in this space is single-family real estate investment trusts (REITs) such as Silver Bay Realty (SBY) and Two Harbors Investment Corporation (TWO). Blackstone Group (BX), a publicly-traded private equity firm is also buying single-family homes at an aggressive rate. Blackstone is the largest owner of residential real estate in the United States. Whether or not this turns out to be an attractive investment remains to be seen.
Becoming a landlord is also an option for investors to cash in on the trend towards a larger population of renters. This alternative has the benefits that the business model is straightforward and historically-low interest rates make it remarkably cheap for credit-worthy borrowers to raise money. Direct ownership of investment property also has some unique challenges of course. If a pipe bursts at four in the morning, you get the call. If your tenant leaves, you have to find a new one. Perhaps most significant, however, is liquidity risk. If you need to get out of your investment, this can take considerable time and effort, not to mention costs associated with selling.
As the fraction of Americans who own their homes declines, there will be impacts across the investment landscape and I have tried to identify a few of these. Over the longer-term, the effects are unclear. The largest wildcard in this shift is that home equity remains the single largest source for wealth for median-wealth households. If fewer people have the enforced saving discipline imposed by a mortgage, will they save less? On the other hand, will the increased mobility afforded to workers who are not bound by a home mortgage enable people to obtain higher wages? There is little question that trends in homeownership have the potential for substantial socioeconomic shifts. Until the larger impacts become clearer, we will have to make do with trying to identify near-term effects.
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