Life can be tough during the past 4 decades if you haven’t invested any assets. As described in a recent story by Bloomberg, the top 1% of income earning households now control more wealth than middle class households, defined as those earning between $27,000 and $141,000.
Yet very few of us actually click through to the data source and take a deeper look at how this happened. Let’s take the difficulty of wealth data collection aside, which is notoriously difficult and still debated heatedly in academic circles to this day. Assuming the data does show an accurate picture, if you do look at the source data, it actually shows a few interesting facts:
- All boats have been lifted – every income level has seen gains in wealth since 1989 and all income levels are at multiples of what they were im that year. Even the income level which saw the slowest growth, those in the 40% – 60% bracket of income, saw their wealth as a whole increase 3.83 times, or an increase of 4.2% annually for the past 30 years.
- The last 4 quarters were a game changer – The 1% by income as well as the bottom 0-20% actually had similar increases in their levels of wealth until the pandemic. Although the lowest income bracket likely benefitted from government programs, the support of the Fed and ultra low interest rates for assets grew the wealth of the 1% by 50% in 4 quarters from 2020 to 2021.
Working in the financial industry, I can tell you from first hand experience there has been an explosion in lending against assets which have dramatically increased in value for the wealthy. This can be against property, stocks, art or just about anything else the wealthy can hold as appreciating assets. There is little doubt that due to the biggest uptick in home prices in the US since the boom in 2006, a portion of that increase was due to home equity.
Inflation and Housing Worries
First time home buyers are coming into a tough and competitive market. Inventories are low and bidding wars are common. Many homeowners are cashing out in high priced coastal areas and buying new homes in cheaper places for cash, pushing out local bidders. This was my personal experience recently when asking my realtor in Texas about who the cash buyers constituted. She responded that they consisted mostly of older buyers who had sold their homes in these expensive markets or younger ones whose parents had provided them with the capital.
The inflation worries are not mutually exclusive from the angst of first time home buyers either. Housing is 40% of the CPI index and there is an intense debate among forecasters, economists and business people as to whether the bout of inflation we are experiencing currently is transitory or not. While that debate rages, investors would do well to hedge their investments in case higher inflation does take hold. TIPS treasury securities are meant to protect against this but they offer little return. Higher yielding investments like energy stocks have traditionally done well in an inflationary environment but this industry is currently in the middle of a shift away from fossil fuels, so it’s future is riskier.
That leaves real estate as one of the last bastions of potential for an investment where inflation can be passed through from owners to renters. There are different forms of real estate from offices to malls to industrial sites but one type of real estate investment is highly sought after currently and it’s leases reset consistently and those are single family homes. The price appreciation and income which can act as an inflation hedge are attractive for investors. Is it any wonder then, that more and more institutional money is being poured into single family homes?
If you have been priced out of a home you want recently, saying you can just put the funds in a REIT isn’t much comfort for you. Yet there are investments you can make in the interim to make sure you won’t be left behind. If you are a regular reader of this blog, you know that rather than taking a little guy versus Wall St. mentality, the products at almost every savers disposal make it possible for the little guy to grow along with that 1%. So if you have FOMO for the single family market, there are a few REITs which may meet your needs without having to deal with a mortgage, moving or tenants.
Single Family Housing REITs
Funny enough there are really only 2 publicly traded single family rental (SFR) REITs to speak of in the US, these are Invitation Homes (INVH) and American Homes for Rent (AMH). Invitation owns 80,000 homes across the country with average rent of $1900 per home while AMH owns 55,000 homes with an average rent of $1700 per home. Both of these REITs are diversified throughout the country but with important concentrations in different areas which can be seen below.
Invitation homes are concentrated in the West and Florida while American tends to have a larger footprint in the Southeast and Texas. Each of these geographies has its advantages and disadvantages. luckily I have some knowledge I can share in this field from owning property in the West and South.
For Invitation, 20% of homes are in Northern and Southern California. Although this is a positive in terms of price appreciation as the median price in California is expected to top $800,000 in 2022, rents are not currently keeping up with price appreciation there. Many landlords are eking out a small margin on rent monthly or none at all. This is a long run challenge if wages there do not adjust. If wages don’t adjust so people can afford homes, they will eventually leave. This can be observed in the net migration out of California of 900,000 people from 2010 to 2019.
The presence in the Mountain West makes up for some of this though as many of those leavers are heading to places nearby where housing is more affordable such as Arizona, Colorado, Nevada, Utah and Washington. Likewise, South Florida and Atlanta likely have better margins than the coastal cities although the Miami area price appreciation is giving places in California a run for their money.
American has a stronger presence in the Southwest with curiously no exposure to South Florida. The company has benefitted from the broad real estate trend across the country in home prices as opposed to rises in concentrated coastal areas. The particular concentrations in the Carolinas, Midwest and Texas point to more room for future appreciation and better margins. The regions which did not see as steep price appreciation during the last boom tend to benefit from better rental margins.
For investors looking to get into this space it’s worth having exposure to both TEITs as well as TCN if you can purchase it. The single family rental sector has returned 15.5% annually since its birth as these 2 REITs in 2015. This contrasts with the entire REIT sector which has seen a return of 6.9% over the same period. Only data center and cell tower REITs have seen better returns over the same period.
These REITs will be poised to benefit from both the demographic trend of the millennial population coming of age in their mid to late 30’s and looking for housing as well as the under building in homes which has taken place over the last decade. So these REITs could continue to experience strong growth into 2030.
More to Come
A number of private equity firms such as Progress Residential with 40,000 units across the country have also flirted with going public as REITs. The market remains highly fragmented with most owners managing 1-2 properties and institutional money only controlling about 1-2% of a $5 trillion market. With ever growing interest in the sector from an inflationary as well as asset class point of view, I expect at least some of these private names to come to the market and cash out. For the rest of us, these REITs offers yet offer some consolation in terms of returns for those of us who may not have the funds to own a whole home yet. Investing in these also may work as a good proxy for the housing market to grow your down payment and have it keep up with the market as you add to your savings. No matter how you intend to play it, single family REITs are poised to remain an interesting subset of the market that this blog will be keeping its eye on.
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