Housing Woes Lift Outlook for Apartment, Home-Rental Stocks
23 October 2018 - 9:18AM
Dow Jones News
By Ryan Dezember
Slumping home sales and rising interest rates are brightening
the outlook for apartment and home-rental stocks.
On Friday, the National Association of Realtors said sales of
existing homes in September fell 3.4% from the previous month and
4.1% from a year earlier. The seventh-consecutive monthly decline
was steeper than economists had expected and marks the latest in a
string of data points that call into question the housing market's
momentum.
Economists and analysts blame rapidly rising home prices that
have strained affordability in many cities. The Trump
administration's tax bill reduced incentives to own. And mortgage
rates rose this month to about 5%, their highest level since the
depths of the foreclosure crisis in 2011.
Some analysts recommend getting out of housing stocks
altogether. "The potential downside risks are greater than the
upside reward potential," Wells Fargo analysts wrote last week in a
note to clients suggesting that they move out of real-estate
investment trusts and seek refuge in shares of large U.S.
companies.
Yet other analysts argue that all the gloom hanging over housing
is good news for owners of apartments, like AvalonBay Communities,
which is up 7.4% over the past six months, and Equity Residential,
which has added 5.7% in that time. Rental-home companies have also
gained, with American Homes 4 Rent climbing 3.8%.
"Having pressure on home sales is a positive for the rental side
of the industry," David Singelyn, American Homes chief executive,
told investors recently. "It should all fare very, very well for
pricing power going forward."
The percentage point added over the last year to 30-year
mortgage rates adds about $135 to the monthly payment on a $250,000
house financed with a 10% down payment, said John Pawlowski, an
analyst at Green Street Advisors.
Not only is the added cost likely to keep some renting longer,
$135 is about 8% of the average monthly rent collected by American
Homes, suggesting that there is room for these companies to raise
rents and remain less expensive than comparable homes for sale, he
said.
"The insulation for the rental landlord looks pretty good
heading into next year," he said.
To that end, Freddie Mac said last week that about 78% of
Americans view renting as more affordable than owning, a rise of 11
percentage points since the mortgage company released similar
survey data six months ago. Freddie also said the proportion of
respondents who said they have no plans to buy homes also rose.
Plenty are looking to rent, though. Sean Dobson, CEO of closely
held Amherst Holdings, said that the last 1,000 houses that the
firm's Main Street Renewal unit has listed for rent have elicited
about 70,000 inquiries from prospective tenants, or about 70 per
property.
Apartment owners too are reporting few problems filling up
buildings and retaining tenants despite a surge in multi-family
construction. A big reason: since the end of the 2007, there have
been some 7.4 million households formed that rent, compared to
about 2.3 million that own their homes, according to U.S. Census
Bureau data.
Affordability among twenty-somethings is also an issue. "Poor
credit, record high student debt, lack of savings for a down
payment and, frankly, the ability to save for a down payment, and
desires for flexibility and mobility are all reasons why
millennials are choosing to rent versus buy today," said Ric Clark,
chairman of Brookfield Property Partners, which owns about 35,000
U.S. apartments.
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Write to Ryan Dezember at ryan.dezember@wsj.com
(END) Dow Jones Newswires
October 22, 2018 18:03 ET (22:03 GMT)
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