America's housing reset: what investors need to know

The American Dream of homeownership was built on two concepts:

So it’s no wonder that over half of Americans now believe the Dream is dead.

Scores are living paycheck to paycheck. And even many who aren’t still can’t justify paying an average $2,329 per month toward a mortgage.

Back in 1960, the median price of a new home was $11,900 – or about $100,000–$125,000 in today’s dollars when adjusted for inflation. Today, it’s between $403,000 and $437,000.

So, yeah, I completely understand why Washington bandied together in rare bipartisan support over the ROAD to Housing Act. The Senate passed it again on Monday with changes that satisfied the House on Tuesday.

(President Trump was supposed to sign it into law this morning, but that action has apparently been delayed…)

I covered the Act several times this year considering its much-negotiated impact on single-family rental (SFR) real estate investment trusts (REITs). Those companies became quite the target in January after Trump wrote on Truth Social that the:

Sure enough, the original language of the Housing Act was debilitating to SFR REITs. And while there have been improvements on that front in the months since, the final bill still bans institutions that own at least 350 homes from bulk-purchasing more houses still.

That will significantly alter SFR REITs’ profit opportunities, clearly. But the larger Act – once it’s signed – will impact other landlords as well, as I detail down below.

My main problem with blaming SFR investment firms is that it completely ignores the real problem of supply.

Put simply, America hasn’t built enough houses.

That’s understandable since the 2008 housing crisis caused people to lose confidence in homeownership. Homebuilders adjusted their activity accordingly, and the resulting difference in output was drastic.

As the years passed, more zoning restrictions were enacted, permitting timelines were increased, and construction costs rose further – all of which made it even less attractive to build homes. And then came the pandemic just as inventory reached record lows.

All of a sudden, everyone wanted a house. But with such limited supply, home prices surged, pushing countless would-be buyers out of consideration.

That’s one of the reasons why demand for alternative housing options has increased so significantly so far this decade – including for manufactured housing. And by that, yes, I mean “trailer homes.”

Except that “trailer homes” and “trailer parks” carry a stigma that simply doesn’t fit the modern reality. Today’s manufactured home communities can actually include cultivated landscapes, plenty of lawn space, and attractive amenities… all for a fraction of traditional home costs.

That’s certainly true of what REITs like Equity LifeStyle Properties (ELS) and Sun Communities (SUI) offer. Their residents tend to own their own mobile homes but then rent the land they “park” on. This arrangement reduces housing costs for everyone involved, both renter and tenant alike.

Despite that obvious attraction, it’s extremely difficult to build new manufactured housing communities thanks to zoning restrictions and continuing stigmas. So Equity LifeStyle and Sun Communities automatically benefit from limited competition.

In fact, they are two of the most successful housing providers in the country these days. And they’ll likely continue to be so despite, or perhaps because of, the ROAD to Housing Act.

Far less difficult to get authorization for are apartment buildings. So that’s where most people who can’t afford the full American Dream end up.

That means apartment REITs like Mid-America Apartment Communities (NYSE: MAA) and BRT Apartments (NYSE: BRT) are doing quite well.

It also doesn’t hurt how Mid-America focuses on Sunbelt states like Texas, Florida, Georgia, Tennessee, and the Carolinas. These places have growing populations thanks to their greater economic opportunities, including lower costs of living and an ever-widening array of jobs.

BRT, meanwhile, has a slightly more varied geography since it also invests in Missouri and Ohio. But it still owns and operates properties in well-located “areas showing positive indications of growth” with “catalysts that promote employment and housing demand.” So it’s succeeding just the same.

No doubt, that trend will continue for some time to come.

What’s much more debatable is the fate of those SFR REITs I’ve already mentioned, such as American Homes 4 Rent (NYSE: AMH) and Invitation Homes (NYSE: INVH). They’re under a lot of pressure from critics who say they and other institutional owners like Blackstone (BX) cut into availability and fuel rising prices.

On the one hand, that criticism is understandable since families have found themselves outbid by larger, better-capitalized players. Yet actual institutional investors – the kind this bill attacks – own a very small percentage of America’s total housing stock.

We’re talking about less than 0.5% of single-family units.

Often, they don’t even compete with homeowner-want-to-bes at all, providing housing instead to those who can’t yet afford a whole house outright. Without them, their tenants would simply be in apartments instead.

So in many ways, SFR REITs are just a convenient current scapegoat to a problem that existed well before they came to national prominence. (The first one went public around December 2012.)

In fact, you could – and I do – argue that they’re a solution to the housing shortage, not a cause.

Despite the demonization of SFR REITs, I’m not completely against the ROAD to Housing Act bill. It includes more than 45 provisions aimed at encouraging housing development, renovating aging housing stock, streamlining approvals, and reducing barriers to construction.

Those are all good things. I won’t argue otherwise.

It’s just that I also have to acknowledge how, if the Act is as effective as its backers say it should be… it will impact residential REITs in three different ways:

The first two factors will affect manufactured housing, apartments, and SFR alternatives alike. The third will especially impact SFR REITs for the worse but could easily encourage manufactured housing growth…

Which could then create more competition for existing players. (Though I think Equity LifeStyle and Sun Communities will be able to manage that threat just fine.)

On a more obviously positive note, assuming that interest rates drop alongside mortgage rates, lower financing costs would support REIT investment activity and therefore share-price potential as well.

I should also stress that any developments from the ROAD to Housing Act will be years in the making. It takes time to find land, obtain permits, and secure financing for any building project, to say nothing of actual construction timelines.

And that’s on an individual property level. On a national scale, any trend takes time to build up momentum.

So while I do ultimately hope this law-to-be does what it purports to do, America’s desperate need for manufactured housing, apartment buildings, and SFR REITs will remain for quite some time. Therefore, Equity LifeStyle, Sun Communities, Mid-America, BRT, American Homes, and Invitation Homes will remain powerful players in the American Dream story.

It’s only a matter of how well their management teams will handle the changing times – and how investors will perceive them – that’s really up for question right now.

Happy SWAN investing!

Brad Thomas
Editor, The Wide Moat Daily

P.S. Stay tuned for my article tomorrow, where I’m recommending a beaten-down stock that could benefit massively as the ROAD to Housing Act goes into effect.

SpaceX (SPCX) is still all over the news, making headlines and causing commentary left and right.

But over here at The Wide Moat Show, we’ve got other companies we want to talk about – like the seven “boring” bargain stocks Nick Ward and I covered in last week’s episode.

They’re primed to yield very nice results, as you can see for yourself when you catch the full episode right here.