Investors in the residential real estate sector are bolstered by the US Census Bureau report that housing starts jumped 16.9% from November 2019. The seasonally adjusted annual rate hit 1.608 million units in December. This is the highest level since December 2006. Overall, housing starts for 2019 climbed 4% over 2018 and new home sales were up 11% from last year.
RESIDENTIAL REAL ESTATE | HOUSING STARTS
This encouraging data has bolstered Wall Street’s confidence in residential real estate, with many REITs returning double digits—iShares Residential Real Estate ETF (REZ), for example, celebrated a 24.5% total return increase in 2019—up from 3.9% in 2018.
Residential Real Estate | What About Affordability?
On the other hand, the otherwise bright housing industry picture is overshadowed by worrisome affordability data. The seasonally adjusted home ownership rate has fallen to 64.8%, down from 69.4% in 2004. That drop in home ownership, despite U.S. 30-year mortgage rates falling to 3.6 % in late 2018, indicates a diminished interest in home ownership or a diminished ability to afford to buy a home—or some combination of both.
The issue is certainly not population related. Population growth data from the US Census Bureau indicates there are 10% more people in the US than in 2006. With an estimated 328 million residents in the US, home ownership remains beyond the financial reach of too many Americans. According to ATTOM Data Solutions, as of Q4 2019, the median U.S. home price ($256,400) is unaffordable for the average wage earner.
Potential Home Buyers in Metro Areas Thwarted by Affordability
Especially concerning is that home price appreciation is exceeding wage growth in 76% of U.S. housing markets. Housing unaffordability is reaching critical levels in metro areas, like Los Angeles, Miami and New York. Almost two-thirds of renters nationwide say they couldn’t afford to buy a home if they wanted to.
Adding to the affordability barrier, mortgages are simply harder to qualify for since the economic downturn. With notoriously lax underwriting standards in the early 2000s leading to the housing crash, the current standards to qualify for mortgage financing remain extremely tight.
Single-Family Rental Investors Poised to Profit
Some forecasters are predicting Millennials will begin buying homes in greater numbers as they gain confidence in their financial means to do so. In the meantime, investors in single family rental homes are expected to profit from the increased numbers of Americans who rent instead of buy.