There is a housing shortage in the United States and house prices seem to continue to rise more and more. In this crazy live Video clip, recorded on January 21Fool.com contributors Matt Frankel and Jason Hall discuss the current state of the US housing market, why prices have risen so rapidly, and what investors need to know about it.
Matt Frankel: We’re going to talk about single-family housing, the state of the housing market in the United States, something that we think maybe should be part of the conversation. Without getting political, we want to talk about something that should be part of the conversation, and just talk about where things are going and how investors can play into it. First let me share my screen. I know Jason wanted to talk a bit about it. This is a real estate investment trust called American Homes 4 Rental (NYSE:AMH) the stock symbol is AMH. They are one of the largest owners of single-family real estate in the United States. If you look at the chart on the top left, here is the inventory of existing homes. I know Jason researched the current inventory of existing homes before the show and practically fell out of his seat. It’s extremely low key and that really puts it in context. Where is he now, Jason?
Jason Hall: I will steal screen sharing. I don’t even want to say it, I want to show it.
Room: I want to show it here. It is a six digit number. Nine hundred and twenty thousand. Do you know what a healthy real estate market has been like historically? About 2 million.
Frankel: About 2 million, yes. Two million for context is about six months of inventory.
Room: Let’s see.
Frankel: Could you zoom in a bit on that? I want to see when was the last time it was a single digit number.
Room: That’s as far as YCharts data goes.
Frankel: As far as the data was kept, it was never a six-digit number.
Room: To the right. That’s the thing. Everyone is focused on this year. I’m just going to show the 10 year old here. Home sales continued to rise and we saw some drop off at the end of the year and that kind of thing because of that inventory number. But it’s the big one. That’s the big thing that people are focusing on is pricing. The median home price in the United States is well over $350,000. It briefly topped $360,000 last year. We’ve seen house prices go up year over year, well, like 130 straight months, something like that. Like 11 or 12 every month, that was good, so that’s where everyone’s focus is. Price side. But I don’t think there’s enough emphasis on supply.
Frankel: There are a few good reasons for the prices. Let me steal this part for a second. There are a few good reasons for the housing shortage we are seeing.
First, a lot of people are hesitant to sell right now. Yeah, home values have gone up, a lot of people have been dipping into their home equity, the COVID pandemic is still alive, well, they don’t want people coming in and out of their homes for tours . A lot of people are just waiting. They can work remotely, so there is no need to travel for work.
It’s also been very, I don’t mean easier to buy a house, but the low mortgage rates have made it more affordable than the prices Jason just showed you. If mortgage rates are at 3%, your monthly payment on the same price of a house is about 12% lower than if it were 4%. This makes homes more affordable for people who want to take advantage of those low mortgage rates we’ve had for the past few years. It was a big part.
Another part is if you look at this graph on the top right of your screen, millennials are reaching their early years of household formation, I would say. This has created a lot of demand that did not exist a few years ago. Millennials are the largest part of the American population by a significant margin. They’re starting to hit their prime home buying years, and another reason I know Jason wanted to talk about, in particular, look at the graph on the bottom left, the number of single-family rental homes in America has gone from about 11 million in 2005 to around 16 million today.
That’s the number of single family homes that are rented out and more and more of those are becoming institutional property over time, that’s still a small part but the company that made this presentation, American Homes 4 Rent, owns about 56,000 homes another REIT called Invitation houses has about 80,000 homes. I think one of Jason’s favorite businesses, Brookfield has a few single-family rentals in its portfolio.
Frankel: One of our favorite companies, Boston Omaha (NYSE: BOMN) just started a house to be built for rent. They begin to build a portfolio.
Room: It has evolved from a niche to a legitimate business strategy.
Frankel: It becomes a big part of the housing landscape. Especially the trend of building to rent. Homebuilders don’t have a ton of capacity right now and one of my favorites, Houses of dream seekers (NASDAQ:DFH), their order book increased by 146% compared to last year. They have about six-and-a-half-year-old quarters of homes that they’ve sold but haven’t built yet. It’s a huge backlog. The fact that American Homes 4 Rent, their entire model is built to rent. They don’t buy houses; they build them to rent them. That’s why it’s not just that home builders have low capacity, it’s that a lot of their capacity is used to build houses, especially for companies that are just going to rent them out.
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