Home ownership has been on the decline since the 2007 to 2009 recession. Sam Zell, chairman of apartment owner Equity Residential (EQR 0.59%), expects even deeper declines from today's low levels.
How low can you go?
According to the U.S. Census Bureau, home ownership fell to 64.8% in the first quarter, down from the 2006 peak of 69%. Although some industry watchers attribute the decline to weak labor markets, rising home costs, and still-tight credit, Zell highlighted another reason at a recent conference: "The deferral of marriage has such a staggering impact on real estate and I just don't think people focus on it."
The trend toward marriage deferral could, according to Zell, push home ownership rates as low as 55%. If it took eight years to go from 69% to 65%, it looks like the housing market could have another decade of weakness ahead of it. Advantage Sam Zell.
A giant landlord
Zell heads up Equity Residential, one of the nation's largest landlords. That means that you should take his 55% prediction with a grain of salt, but don't dismiss it. If he's even close to correct, Equity Residential is positioning itself to be an industry leader.
The company focuses on coastal cities with high barriers to entry. Such core markets include New York, Boston, LA, and Washington D.C. In total, Equity Residential's 10 "core" markets accounted for 90% of its portfolio. Equity Residential is also an active portfolio manager, selling properties containing 26,250 apartments while adding 21,781 apartments last year. The end goal is to get increasingly large in the most desirable markets.
Since the cost of home ownership is high in Equity Residential's core markets, even when home ownership starts to tick higher again, the landlord should see continued strength. That doesn't mean that owning a home is a bad business decision, of course -- if you plan to rent it out, that is.
The lifestyle without the ownership
Equity Residential points out that owning a home is increasingly a lifestyle choice. That's true, and areas with high home prices, like the ones Equity Residential favors, logically tilt toward rentals. In other regions where homes are cheaper, however, that "lifestyle choice" becomes more desirable even if owning a home isn't.
That's where a new crop of landlords comes into play, like American Homes 4 Rent (AMH 0.03%) and Silver Bay Realty (NYSE: SBY). American Homes is the industry giant, with some 23,000 homes across 22 states. This real estate investment trust (REIT) was building its portfolio aggressively up until late last year. Now, with a scale unmatched by other pure-play rivals, growth is naturally going to slow.
American Homes is shifting toward more of what it will look like going forward, initiating a dividend and turning increasingly selective in its purchases. Rival Silver Bay Realty, however, points out the value to be had in buying single family home landlords. Value is harder to come buy in the apartment REIT space.
Silver Bay has begun reporting Estimated Net Asset Value. This is a non-GAAP measure, but it's meant to show the price appreciation within Silver Bay's portfolio. The estimated net asset value of the portfolio was about $20 a share at the start of the year, versus a book value of around $17. The company's price has recently been around $15 a share. Extrapolating the trend to the other single-family players suggests that there's still value in the rental market if you look past the obvious (apartments.)
The direct and indirect way to play
Buying an apartment owner like Zell's Equity Residential is a way to play the trend toward renting. However, houses are still a desirable lifestyle choice even for renters. That makes the young and still untested American Homes 4 Rent and Silver Bay worth a deeper look if you want to find a landlord trading at a value price.
