Sam Zell, the founder of one of the largest apartment owners in the country, thinks home ownership is on the outs. Bill Miller, the manager of a mutual fund that beat the S&P 500 Index for 15 consecutive years, thinks home ownership is ready for a rebound. Zell's Equity Residential (NYSE: EQR ) is the right choice if you think he's right and DR Horton (NYSE: DHI ) is a good option if you think Miller is.
A house isn't what it used to be
Home ownership in the United States has been on a downward trajectory since peaking at around 69% in 2006. That was just before the housing market essentially blew up. In the end, there was plenty of blame to go around for the 2007 to 2009 housing led recession. But, no matter who was at fault, that deep recession has left many wounds.
For example, many young people have been unable to find good jobs. With large school debts and limited work prospects, they've stayed home with mom and dad. If you don't have a family and kids, why buy a home? Basically, it's a story of life delayed.
That's essentially Zell's argument in a nutshell.
In fact, he believes that home ownership could sink another 10 percentage points below today's around 62% level. "The deferral of marriage has such a staggering impact on real estate and I just don't think people focus on it," according to Zell.
Interestingly, Miller doesn't refute any of this.
Miller, who runs Legg Mason Opportunity Trust, recently explained to Bloomberg that, "The housing recovery is far less robust right now than it's ever been historically coming out of a recession." While that's a cause for "confusion," it's also an opportunity.
According to Miller, "Anytime there's a cataclysm, people always say it's never going to come back. I don't believe there's been a secular change in demand for housing. People may just rent longer than they otherwise would have before eventually buying." And he's buying home builders to get ready for the eventual upturn.
Follow the apartment leader
You can ride the coattails of Zell or Miller, if you'd like, fairly easily. Zell, for example, is the Chairman of Equity Residential, one of the nation's largest landlords. It owns nearly 400 apartments with over 100,000 units. It's been repositioning its portfolio around high barrier to entry markets with desirable demographics like New York, D.C., Seattle, San Francisco, and L.A., among others.
The numbers speak volumes. The average rent across the United States was around $1,125 last year. Equity Residential's average rent in its core markets was just over $2,200. Comparing Equity Residential's average rent to just its core markets is similarly impressive, with Equity Residential holding a $325 edge.
Although Equity Residential's occupancy ended 2013 about 60 basis points worse than average in its core markets, it was about 50 basis points better than the U.S. average. With higher rents all around, Equity Residential is clearly in a good position to succeed in the falling home ownership world that Zell envisions.
The other side of the bet
If you take Miller's side, however, you should look at D.R. Horton, one of the nation's largest home builders. This massive builder has operations in 27 states and offers homes for first time buyers all the way up to those seeking luxury accommodations.
After the housing downturn, Horton focused on running its business better. That's led to an over six percentage point improvement in home sales gross margin between fiscal 2011 (years end in September) and the second quarter of fiscal 2014. Now, with home sales gross margin at over 22%, the company expects "revenue growth to be a stronger driver of our earnings growth going forward..." Assuming that Miller is correct and home buyers come back, D.R. Horton is running lean and mean.
One for today, one for tomorrow
If you are watching the home market, Zell's Equity Residential appears to be making the right moves for today's environment. However, Horton is clearly readying itself for Miller's expectation of a reversion to the home buying mean. That may take a little longer to materialize, but that shouldn't diminish the opportunity for those with a longer-term view of the world.
One trend that both investors may agree on
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