How millennials are transforming the US housing market

More millennials are renting homes rather than buying, prompting large listed companies to cater to the trend.

Demand for urban single-family homes exceeds supply. The need of young families hasn’t changed – good schools, more space and good transport links. However, the size of this age group has increased.

Soaring home prices has forced many young families to rent, as home prices, despite low interest rates, have risen in excess of wage growth.

We look at the reasons why and the consequences of this shift.

The new boom

The single-family rental home market could be on the precipice of a boom in demand as ageing millennials move out of their rented city apartments and into bigger urban houses.

Source: Company filings 10 August 2017

The high cost of city living and relatively short supply of urban family homes suggests that millennials will continue to rent as they move. This presents a significant opportunity for companies exposed to the single-family rental home market.

The shortage of suitable property has driven up prices. Large listed companies with access to capital have stepped in, buying properties and then leasing them back to families.

Starwood Waypoint Homes and Invitation Homes recently merged to create the largest single-family rental home Real Estate Investment Trust (REIT) in the US. REITs are companies listed on the stock exchange which invest in property and profit from rental income.

Starwood Waypoint-Invitation Homes has a combined value of $20 billion, once debts are taken into account, with approximately 80,000 homes. When we assessed the company we concluded that it was well positioned to benefit from powerful demographics and exposure to the top cities in the US.

Why rental demand is set to remain

Over the past decade, the millennial generation (21 to 35-year-old age group) has fueled the demand for rental apartments in the US.

Following a rise in birth rates and immigration, millennials today outnumber Generation X, those born between 1965 and 1982. But it is not just about population numbers.

The recession and social factors - getting married and having children later in life - have contributed to millennials staying in apartments longer than previous generations.

As a result, the homeownership rate, which had peaked in 2004 at 69%, steadily declined until bottoming out at 63% in mid-2016.

With the oldest millennials currently reaching their mid-30s it is time to move to a bigger home with access to good school systems.

In past economic cycles it would be a ‘no-brainer’ for millennials to buy.

However, given the high cost of land in urban hubs, where millennials still want to be, the production of single family homes remains well below the pace of household formations.

The availability of existing homes remains near historical lows too, which is in part due to baby boomers being not quite ready to sell.

That’s where companies such as Starwood Waypoint-Invitation Homes could potentially benefit: millennials want to move to bigger residences with access to high-quality schools but given the lack of homes for sale, they settle for rental for a few years.

Given that we are just on the precipice of millennials reaching their mid-30s, we believe the demand should be in place for the next decade.

12.5m new households are expected to form over the next 10 years

Source: John Burns Real Estate Consulting Company files 10 August 2017

The forecasts should be regarded as illustrative of trends. Actual figures will differ from forecasts.

Global cities

The best cities create employment opportunities. It is a crucial measure in evaluating our Schroders Global Cities index rankings.

The single-family rental sector allows families to benefit from proximity to excellent locations. Strong demand and limited supply has created affordability challenges when it comes to buying a home. Institutional capital has stepped in.

Conclusion

Market forces have dictated that prices for single-family homes have become too high, as there is insufficient supply to meet demand.

Listed REITs have access to cheap and plentiful capital. They have used this capital to acquire large portfolios which they let out. This rental sector emerged from the distress of the subprime crisis a decade ago, as large portfolios of homes were sold in fire sales.

While the home ownership dream might be put on hold for some, it has created attractive returns for the companies that now own large numbers of these homes.

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Ryan Bennett is an author on the Global Cities blog, analysing the prospects of the world's major urban hub.

Important Information: The views and opinions contained herein are those of Ryan Bennett, Securities Analyst, Real Estate, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The sectors and securities shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. The opinions in this document include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA. Registration No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.

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