Renter Nation Replacing American Dream

by: Markos Kaminis

The American dream of home ownership is dying today. Housing hounds will likely snarl at my take of the latest Housing Starts data, but the truth must be told. While housing starts gained ground in January, that ground was overwhelmingly taken through the construction of multi-family projects upon it. If the investment community thinks a renter nation is a healthy nation, well then it has been misled.

Housing Starts (pdf), reported last week for the month of January, gained by 1.5% over December, and ranked 9.9% above January 2011. However, single-family housing starts, which are typically seen as the key measure of housing health, actually fell 1.0% against December. The growth highlighted by the headlines was all found in multi-family units of 5 or more, where construction increased by 14.4%. A shift toward a renter nation is not indicative of a healthy atmosphere by most means. There's just one driver we view healthy for multi-family growth, and that's driven by demographics. Our aging nation is aiding the growth of the senior housing segment, as seen in the long-term chart of the Senior Housing Properties Trust (NYSE: SNH).

Still, we suggest that it is precisely the shift in the economic situation of a great many Americans and the shift in the lending environment, which has severely damaged the prospects of home ownership in America. Some of that change is of course for good reason, with no more liar loans issued and "no credit, no problem" guarantees made any longer. Higher scrutiny and regulation of the industry was of course a necessity after the alleged negligence (by several Congressmen at minimum) of the rating agencies. The rating agencies regularly rated mortgage backed securities investment grade, due to the diversification provided by investment pools. Unfortunately, they under estimated the possibility of broad real estate value decline across the nation that might affect the whole pool of assets, and also did not account adequately for the bubble blowing, greed driven business that was happening at some financial institutions in the qualification of borrowers.

Bill Clinton's revival of the American dream of home ownership has hit a serious snag today. Indeed, home ownership is on the decline after peaking in 2004 at 69.2%. It's been falling over recent years, due to the financial crisis and resultant foreclosures, economic recession and resultant unemployment and the changed financing environment around real estate. In the fourth quarter of 2011, home ownership was measured at 66.0%, and that was down from Q3's 66.3%.

Given the latest trend reported in the Housing Starts data over recent months, it appears home ownership will deteriorate further. While the popular press was touting it, and the stock market was celebrating Housing Start growth of 1.5% in January, we were pointing out the 1.0% decline in single-family property starts. While single-family activity is up 16.2% against the low bar set in January of 2011, single-family construction permits are up only 6.2% against the prior year. On the contrary, permits filed for multi-family units are up 61% against the prior-year period. Take heed my fellow citizens, because the American dream is at stake.

In the zero sum game where many are suffering, some are getting richer. While the shares of residential real estate REITs had their issues through the crisis, and have traded choppy over the last six months, the last year's trading has most of the largest players clear in the green. Market Cap leaders Equity Residential (NYSE: EQR) (+11.6%), AvalonBay Communities (NYSE: AVB) (+18.3%), American Capital Agency (NASDAQ: AGNC) (+24%), UDR, Inc. (NYSE: UDR) (+10.9%) and Essex Property Trust (NYSE: ESS) (+27%) are all sharply higher over the trailing twelve month period, adjusted for dividends and splits. The same goes for homebuilders over recent months, though we take issue there. The apartment managers should continue to benefit from America's shift toward a renter nation. Though, given the ongoing economic issues plaguing our country, we wonder how many of those new renters are up-to-date on their rent. That said, net-net, gains still favor rental property managers.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.