The U.S. economy may have just shown improvement, growing at an annualized 3% in the second quarter. But the U.S. housing market?
That’s still a mess.
We learned this week that the 2025 spring season – typically the busiest time to buy and sell a home – was the worst it has been in over a decade.
And there’s not much hope for the summer months either considering all the data we now have. This includes how sales of existing homes fell to a seasonally adjusted average annual rate of 3.93 million – a nine-month low.
Of course, we also have to factor in mortgage rates. At 6.475%, a 30-year mortgage is better than it was in January at 7.04%. And keep in mind that they hit 7.22% in 2024 and a whopping 7.79% in 2023.
So, that’s modest improvement.
Then again, home prices aren’t as cheap as they were in 2023 or 2024. Last month, the median existing home went for a record $435,300, according to the National Association of Realtors.
Even if someone managed to have the $87,000 necessary for a 20% down payment, Bankrate says they’d still be paying over $2,000 per month once property taxes and homeowner’s insurance are considered. And if they only have 10%, which is still $43,530… they’re paying $2,285 per month.
Just 5%? That’ll be $2,412 per month, thank you very much.
The average teacher’s salary is about $72,000. The average accountant’s is a bit over $81,000. And think around $109,000 for engineers.
This is all before taxes, of course. Add in car payments, utilities, and basic necessities like groceries, and homeownership is simply unaffordable for far too many Americans.
This is not the place buyers want to be right now. It’s not the place sellers want to be.
And, frankly, most residential real estate investment opportunities aren’t worth pursuing either until something significant changes.
Trump’s Tariffs Add to Housing Market Woes
Back in January, I wrote about “how to handle homebuilders as we wait for ‘The Trump Effect’ to kick in.” The way I saw it, President Trump was going to transform the American economy, ushering in a national Golden Age.
That included making homeownership affordable again.
I still expect that. But there’s a reason why I never claim to have a crystal ball. Because I don’t. Nor does anyone else.
The future is unpredictable, as Liberation Day proved.
Long term, Trump’s tariffs are bringing business and direct investment back to the U.S. The recent trade deals with Japan and the EU show that. And individual businesses both at home and abroad are committing their own massive amounts.
But these victories have come at the cost of a lot of short-term turmoil.
The markets, which are notoriously hostile to uncertainty, haven’t been the only thing roiled by Trump’s tariffs and tariff threats.
As I wrote on July 24, globalization has been the name of the game for decades now. Even companies that make their final products here in America still often get many of their parts and pieces abroad.
One of the impacted industries is homebuilders. The United States imports approximately one-quarter of its lumber, mostly from Canada. Lumber, of course, is a key ingredient in new home construction. As construction costs go up, the price of the finished home goes up, all else equal.
All of that can change if the administration can continue to secure trade deals. But, for right now, it’s one more bit of angst for the residential housing market.
Combine this with the Federal Reserve, which kept interest rates steady once again yesterday, and I just don’t see many reasons to be very optimistic about the housing market.
To be clear, I do think these imbalances will be addressed… eventually. As a real estate developer, I’ve seen my fair share of real estate cycles. Things never stay depressed forever.
But, at least for the time being, residential housing will stay under pressure. And that means one thing: would-be homebuyers – and investors – should be looking at rentals.
It’s a Renter’s Market
Yesterday, I appeared on Fox Business with Charles Payne. If readers are interested, you can catch the segment by clicking the image below.
As I told Charles:
The housing market is really sluggish. Pending home sales are down to 13-year lows. Mortgage rates have come down. But it comes down to affordability. And mainly the entry buyer – the new buyer – is really struggling. And so the way we’re playing that trade is on the rental side.
If you’re a subscriber to The Wide Moat Show on YouTube (be sure to catch it here!), then none of this should be surprising. Last week, Nick and I discussed how the question of affordability favors rentals over homeownership… by a wide margin.
As I mentioned above, the average mortgage for the markets we looked at was north of $2,200. But for an upscale rental? That figure is closer to $1,600. It’s not even a question. Rentals will be the preferred option.
One of my favorite real estate investment trusts (“REITs”) in this space is Mid-America Apartment Communities (MAA). As I shared on the show, MAA boasts approximately 104,000 total apartment units.
Importantly, these communities are highly concentrated in desirable areas in the American Sun Belt. And, as I’ve shared on numerous occasions, this area of the country is seeing high levels of in-migration. You can get an idea of their portfolio below.
Source: Mid-America Apartment Communities Investor Presentation
Importantly for investors, it has an A-rated balance sheet and a well-covered 4.1% dividend yield.
The stock sold off about 5% this week. But, for a company as strong as MAA, these short-term moves really don’t bother me.
Besides, it has brought MAA down to attractive levels.
As I write, the REIT trades for 19 times adjusted funds from operations, a fair proxy for earnings in the REIT space. That compares with its five-year average multiple around 21 times. That seems like an attractive discount to me, especially for a company as high-quality as Mid-America.
In time, the housing market will find ways to get back to equilibrium. It always does.
But for the time being, it’s a renter’s world. And you’d be hard-pressed to find a company better situated to take advantage of that than Mid-America.
For value- and income-centric investors, it should definitely be on your radar.
Regards,
Brad Thomas
Editor, Wide Moat Daily
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