The release of two separate sets of data on the housing market on Tuesday morning could spell trouble for the recovery in the U.S. market. The closely followed Case Schiller index of U.S. house prices showed continued strength in single family home prices, up 0.8% in February, roughly in line with estimates. The less publicized Census Bureau report on house ownership in America, however, showed that the trend away from buying is continuing. Only 64.8% of Americans now own their own homes. This is the lowest reading since 1995.
You don't have to be an economic genius to realize that something is wrong. Prices cannot continue to rise if an essential component of demand is falling. One or the other of those trends has to change. On the surface, it would seem that change is most likely to come from the home ownership numbers. The U.S. is, after all, a country built on the individual property ownership. During the real-estate-led recession, many people were forcibly removed from home ownership and many others had to defer entry into the housing market. As prices pick up, it would be logical to expect those people to re-enter the market.
The fact that the Census Bureau's number continues to trend downward, however, suggests that something else is at play. Sam Zell, the chairman of Equity Residential (EQR), has no doubt what that is. He has several times pointed out that fewer people are getting married and those who do are marrying later in life. According to a Bloomberg article, U.S. Homeownership Rate Falls to the Lowest Since 1995, in 2010, only 54% of U.S. adults were married compared to 57% in 2000. Obviously, Zell has an interest in talking up the apartment complex business as his company is the largest apartment landlord in the country, but the numbers do seem to support what he says.
If he is right and this is a long-term trend, then the recovery in housing prices, which has shown signs of stalling, is about to come to an abrupt end. If prices start to fall again, then potential buyers' confidence in the market will be shaken for the second time in less than a decade -- and the fall will likely be fast and steep.
I actually don't believe that another collapse is imminent. It may be some time before prices really start to drop. But, even if trends continue as they are, it makes sense to follow Zell's lead and invest in apartments. Demand for rented accommodations will keep increasing, but as long as real estate prices remain buoyant, so will the value of the buildings that the large landlords own. It looks like a win-win for the multi-family housing business.
The best way for you and I to profit from this situation is by owning stock in companies such as Equity Residential and in apartment Real Estate Investment Trusts (REITs). This is a sector that has done well since the recession, but if what we are seeing is a genuine demographic shift rather than a trend, then it will pay to have some exposure to it, even at these levels. In a situation like this, a long term play on a sector, don't look for one stock. A split investment makes sense and, rather than gambling on the fortunes of a small player, remember big is beautiful.
According to the trade site Multi Family Executive, the top three apartment REITS by assets are the aforementioned Equity Residential , Avalon Bay (AVB) and United Dominion Realty (UDR). As REITs pass profits through to owners, an investment split between them would offer a yield of around 3.6%.
Given the performance of the sector since 2009, investing in apartment REITs is not going to make you rich quickly. If the two sets of housing data are taken together, however, then multifamily housing appear to have a solid future. That investment does look attractive from a long-term perspective.