The Opportunity in Housing Market is NOT a House

Many years ago, my wife and I went to the public library. We were young, newly wed and broke… so the public library was a great resource.

She walked away with several sci-fi books and thrillers. My stack included a book on monetary policy in Romania in the 1950s. Granted, it wasn’t a page-turner, but I did find it interesting.

Obviously my taste in reading material is decidedly non-fiction and technical, but every once in a while I need a break. When that happens I turn to a great source of humor and fantasy – the National Association of Realtors (NAR).

In the world of fiction, the National Association of Realtors is one of the best writing groups in the world. For five years this group has continuously pumped out reports that show the housing market is at its cyclical lows, a screaming buy and on the verge of a turnaround that will astound and amaze!

The only thing left for people to do is buy, buy, buy! Then… of course… nothing happens.

So has the housing market bottomed?

We don’t think so, but even if current house prices prove to be the lows, the chances of a wildfire run in the price of homes seem remote at best.

We just came out of a decade where the availability of cheap credit drove home prices and the number of units sold to lofty heights. Who expects that to return? No-one with any grounding in reality, that’s for sure.

Instead, what has occurred is a reality check that continues to frustrate the NAR but makes perfect sense to everyone else.

The pendulum has swung from a government- and bank-induced focus on home ownership, that treated shelter like a can’t-lose investment and ATM, to a more reasonable approach that treats housing like what it is, a place to live.

In this new normal, where sanity prevails, people ask themselves all sorts of interesting questions like, “Can I afford this home?”… “Do I plan to live in this area for many years?”… “Is my income safe?”… “Is this home worth the price?”… and the all-important, “Do I want to be tied down to a home right now, given the state of the economy?”

As you might imagine, many times the answer to one or more of those questions is “No!”

New home sales are roughly half of what is considered “normal,” while existing home sales are about 20% lower than what the NAR thinks they should be.

But all those people have to live somewhere, and there aren’t that many friends’ couches up for grabs or parents willing to take back aging kids and their spouses, children and pets.

That’s why the bulge in the marketplace is in rentals… and it is not showing signs of slowing down.

We’ve discussed this trend many times in our research because it’s a result of two larger trends driven by demographics.

First, consumers that would have been home buyers in earlier years are shying away from that market. This leads to a tremendous increase in demand for rentals.

Second, investors searching for yield will find this market and invest in the streams of rental income. This is what drove us to identify an apartment REIT last year as a good investment for our Boom & Bust portfolio. This REIT is now reporting 97% occupancy and expects to drive up its rental income – and subsequent payout to shareholders – this year.

The point is that, just as our publication names imply (Survive & Prosper and Boom & Bust), there are two sides to every market. If you are flexible enough in your outlook, you can adjust to the changing facts on the ground and join the growing trend instead of being run over while you hang on to what was the best choice for yesterday.

…Unless of course you are writing forecasts for the NAR, which, to remain relevant, must hang on to the notion that everyone wants to be a homeowner.

For the rest of us, if you’re interested in a good dose of fiction, you can probably find these NAR reports in your local library.


Rodney

P.S. We have a position in our Boom & Bust portfolio that has massive upside potential thanks in large part to the current housing situation, the hangover from the excessive debt years and the inexorable demographic trend underway. Plus, we’re happy to collect nearly 5% in annual income along the way.

 

 

Ahead of the Curve with Adam O’Dell

It’s Still Possible to Make Money with Homebuilders

Four years after the worst home price crash in memory, the rental market continues to outdo the new home market. But that doesn’t mean there isn’t money to be made with homebuilders.

 

 

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Categories: Economy

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.