8 Unconventional Ways To Play Today’s Housing Circus


Last week, I got a piece of mail from a local real estate broker that included an estimate of what he thought his firm could sell my house for right now.

I knew the price had gone up because Florida and Southwest Florida, in particular, have been popular destinations for people looking to escape the high tax, more densely populated northern cities. The pandemic and summer of civil unrest spurred many people to leave cities with higher taxes and winter, and head for the Sun Belt regions.

Even after adjusting for the fact that the broker inflated the number a little to spur me to action, it was still a stunning increase over what we paid for the place a year ago.

I am not telling you this to brag about my fantastic prowess as a single-family home investor.

(In truth, I had little to do with what we bought and only vague instructions about being near a beach. Every other detail and decision about the purchase was my wife’s. Any portion of the gain that has resulted from owning the house resulting from home-buying prowess is her skill, not my own.)

Instead, I am telling you this because you’re probably in a similar situation.

This has been happening across the United States as housing has been hit with a perfect storm of price drivers:

  • Even before COVID hit, we had a housing shortage
  • Then, the COVID-inspired city exodus helped push prices higher and further tightened the supply of houses
  • Millennials finally getting around to family formation and grandchild creation have also helped drive demand and prices higher

The demand surge from millennials caught the market unprepared, and the homebuilding industry was scrambling to keep up. As demand grew, we found that more than 60% of homes in the United States are owned by folks over 60 who have little to no desire to move. As a result, housing supplies were tight even before the pandemic poured fire on the demand wave.

The Problem

Today, first-time home buyers and even second move-up buyers are being priced out of the housing market as for-sale home prices rose 23% last quarter.

So what do they do? They move downstream to single-family rentals. This demand then pushes rents up in many parts of the country.

According to real-estate analytics company Yardi Matrix, which monitors professionally managed properties, asking rents for residences increased over 13% year to date through July, the largest yearly rise in the last five years.

That current 13% annual increase in rental costs dwarves the ~6% inflation rate in everything else that has everyone so concerned. Rents across the U.S. are experiencing almost four times the average yearly growth rate before this pandemic ever happened.

Rents are rising especially fast in smaller cities and towns that are seeing an influx of people fleeing the ongoing pandemic headaches and the rising crime rates in the larger cities. 

Last but not least, builders have been focused on higher-margin higher-priced homes. As a result, virtually no one has been building first-time buyer-level homes, to say nothing of affordable housing units.

These are all problems.

So, what’s the fix?

Also, are there any ways to play it?

How To Use Rising Rents To Our Advantage

I’m confident that the government is going to step in and attempt to turn the tide of affordable housing supply. But, unfortunately, I have no doubt they will do their usual wonderful job of actually making matters much worse than they already are.

I have more faith in the ability of capitalists to solve the problem than the government having much impact.

That’s why I am keeping an eye on several companies that are positioned to benefit the most from all the chaos.

First up, are businesses that build manufactured housing (commonly known as mobile homes in the U.S.) that can offer an alternative to traditional homes. Several REITs run mobile home and manufactured housing communities, and I am keeping an eye on those hoping that opportunities develop. Below are two REITs that come to mind:

  • Equity Lifestyle (ELS)
  • UMH Properties, Inc. (UMH)
ELS stock
umh stock

Part of Biden’s plans to support affordable housing is to have Fannie and Freddie make mortgages available for manufactured housing and 2-4 unit dwellings like duplexes. That should also create opportunities for some multifamily builders, such as:

  • Lennar Corp (LEN)
  • Kennedy-Wilson Holdings, Inc. (KW)
LEN stock
KW stock

On the same token, mortgage lender banks should see some increased loan demand that drives profits higher. A couple that comes to mind is:

  • Texas Community Bancshares (TCBS)
  • Luther Burbank Corp (LBC)
tcbs stock
lbc stock

Lastly, when you look at the Home Building Geography Index released this month by the National Association of Home Builders, it is easy to see that builders are responding to meet the demand for affordable rentals… but are avoiding the larger cities for now.

The land is cheaper in suburban areas of the country and the regulations are not as intense as they are in urban environments… so that’s where multifamily home builders are focusing their effort.

The report also showed that multifamily residential construction grew by 14.3% in small metro urban cores and 25.5% in small metro suburban areas in the second quarter. However, in larger city metro core markets, construction activity declined.

This research led me to explore some possible opportunities here as well. This includes looking at the large landowners in smaller cities and towns like:

  • Tejon Ranch Companies (TRC) in California…
  • The St. Joe Company (JOE) in Northwest Florida…
trc stock
joe stock

Putting it all together, that gives us the following sectors to look at as this housing circus plays out…

  • Affordable and first-time buyer builders
  • Mobile Home REITs
  • Financiers (Mortgage lender banks)
  • Large landowners in smaller cities and towns

Best,
Tim