Bullish on the ‘burbs

US urban living is still losing its shine, three full years after Covid-19 shut down city centres. But apartment rents haven’t declined — yet.

While the prospect of continued city flight has sent office-property valuations into a freefall, US rents are still up, with an 8.8-per-cent rise from last year, according to the Census Bureau’s inflation data. (The median Manhattan rent rose to a new record in March, via Elliman.)

Now some Wall Street analysts expect more Americans to abandon city-apartment rentals for greener pastures, and either buy or rent elsewhere. Analysts’ logic is backed by a simple argument: as Millennials start families, they should keep following the well-trodden path out of city centres into the suburbs and exurbs, in search of cheaper and more spacious living, along with more accessible childcare.

JPMorgan’s strategy team led by Joyce Chang argued in an April 28 note that those trends will drive younger Americans to buy homes:

We expect an increase in demand from first-time homebuyers as Millennials begin forming households in greater numbers. According to the National Association of Realtors, the median age for first-time homebuyers is 33 years old, and according to the CDC, from 2021-2026, the number of people turning 30 years old will average 4.0bn, 18% higher than the 3.4mn people who turned 30 years old from 1998-2005. US Census Bureau data confirms a rise in home ownership among those aged 18-34, while the percentage of those aged 18-34 living with parents is levelling off. We expect the influx of first-time homebuyers from Millennial household formation to provide a major tailwind to housing demand.

One could make counterarguments to dampen enthusiasm about the ‘Millennials Save The Housing Market’ story, of course.

But most of them just support JPMorgan’s argument that US housing markets will be fairly insulated if (or perhaps when) a recession arrives.

First, interest rates on fixed-rate mortgages are still quite high, as you can see from Freddie Mac’s weekly data, even if they aren’t rising much anymore. The blue line below shows 30-year rates, and the green line shows 15-year:

Second, the housing-supply crunch is still real! From JPMorgan:

The inventory shortage is still a relevant theme with new listings down 22% YOY. Fewer homes are hitting the market, limiting the options for first-time buyers and those looking to upgrade or cash in on equity built up from the rise in property valuations. The pandemic drove a wave of migration to suburbs and localities as homebuyers were attracted to lower costs of living. This effectively pulled forward future supply to meet near-term demand, contributing to tighter housing inventory.

The strategists also point out that the median age of US housing stock has been climbing for decades:

Again, this is not a bad thing for home values. The bank writes:

The worst of the housing downturn may have already occurred as the housing market fell into recession last year as measured across home sales and housing starts. The outlook for the interest sensitive housing sector is tightly related to the policy environment. Overall, existing home sales are down 22% over the past year as mortgage rates increased. However, new home sales in the US beat expectations and jumped 9.6% in March. The March data joins other recent housing indicators in signalling that the stabilisation of mortgage rates is supporting a modest pick-up in housing demand. February housing prices also surprised to the upside, with FHFA and S&P CoreLogic increasing 0.5% and 0.1%, respectively.

This brings us to a new analyst call based on city flight. Bank of America analysts argue on Monday that the US housing shortage and high mortgage rates will not only support residential housing, but also support suburban rents.

Fear of a recession has been the biggest concern . . . If demand weakens, we expect (1) suburban outperforms urban and (2) coastal would outperform sunbelt. The rationale: supply.

Demographics suggest we are at or past peak demand for urban apartments.

So they’re bullish on residential REITs that own and operate more suburban properties (at least outside of the Sun Belt, where rents are softening). The bank’s analysts upgraded AvalonBay to “Buy” Monday, because it has 68-per-cent of its exposure in suburban markets.

The analysts are also bullish on UDR because of its larger exposure to suburban markets. Invitation Homes and American Homes 4 Rent/AMH are on their “Buy” list as well, obviously, because those businesses are centred around single-family home rentals.

One thing that’s missing from this picture is the ever-elusive pandemic-baby boom, as birth rates have rebounded slightly from their pandemic-era lows. But while the number of homes with children under 18 remained below levels from 2019, according to the Census Bureau, new household formation brought the total number of US households to a new high in 2022.

So it makes sense to think suburban rentals could be the ticket for younger Americans looking to move outside of major city centres, especially with mortgage rates above 6 per cent and strong shelter inflation. As JPMorgan argued, that should lend support to home prices in an economic downturn.

Or to put it into simple internet-speak: homeowning Boomers stay winning.