The pandemic has created a list of scarce items.  We continually hear about the latest shortage or backordered item on a daily basis.  We continue to experience scarcity in nearly all sectors, from lumber to microchips to dumbbells, and – yes – houses.  For buyers, securing a new home under contract may even feel like finding the last package of toilet paper when Covid-19 first struck. 

The supply of homes simply cannot keep up with demand.  But is this transitory or will this be a persistent supply and demand imbalance in the years ahead?  Let’s explore some reasons why the housing shortage (in certain markets) may not end anytime soon.

Inventory

If we look back to 2007 and 2008, we can easily see the massive supply of inventory leading up to the financial crisis of 2008.  A healthy supply of homes on the market is generally considered to be six months or less.  In 2008, we reached a 10-month supply.  Fast forward to 2021 and you see the supply is under two months.  In a number of hot markets, supply is as low as 12 days!1  This means, if new sellers did not list their homes for sale, the supply would be depleted in 12 days.  Homebuyers today are purchasing for many healthy reasons.  We see increased flexibility to work from home, increased savings, and low interest rates driving purchases. 

Underbuilt New Construction

The graph, shown below, goes back to the early 90’s and shows a 30-year average of single-family construction units completed.  Most years were slightly overbuilt for the average and, leading up to 2008, single-family homes well exceeded the average.  The years leading up to 2008 were marked by overbuilt new construction speculative homes.  Credit standards were considerably relaxed compared to post 2008 credit reform.  Many builders built speculative housing without presales and many buyers were purchasing speculatively for pure investment.  As the oversupply of inventory from 2008 and 2009 was absorbed, builders were experiencing the Great Financial Crisis.  Many builders left the industry and lending standards became considerably more stringent for builders. 

As a result, we have the lowest volume of new construction homes in decades, placing us below historic levels in terms of meeting demand.  This demand has created support for single-family housing and rental values.  A lack of construction workers and lack of available buildable plots contributed to the housing shortage and is not likely to improve in the near term. 


Source:  Bloomberg as of May 24, 2021

Housing Cost Relative to Income

Is housing too expensive?  It definitely “feels” expensive to those watching prices increase.  Home prices have surged and building costs are spiking due to increased prices of raw materials.  In spite of this, housing costs, as a percentage of disposable income, is well below the 35-year average.  This is largely due to low financing costs.  We believe increasing wages will also contribute to affordability in the future. 

Many headlines are quick to emphasize the fact homes are less affordable than last year.  Black Knight, a leading provider of data and analytics across the home ownership life cycle, recently reported on this issue.  The findings show the historical averages of the national payment to income ratio defined as “the share of the median income needed to make the monthly payments on the median-priced home.”

The findings report the historical averages of the national payment to income ratio as follows:

Source: https://cdn.blackknightinc.com/wp-content/uploads/2021/06/BKI_MM_Apr2021_Report.pdf

This graph below further illustrates the household debt as a percentage of disposable income is at all-time lows since 1986.

Current Amount of Leverage

One of the warning signs in the housing market is observing too much leverage.  As this chart below shows, cash out refinancing leverage utilization was high from 2005 to 2007 as many consumers took out equity to purchase speculative investments or use for consumer spending.  In recent years, we see a gradual uptick in cash out leverage, but still far below 2006 levels.  Credit has remained limited for cash out refinances and many consumers are using cash out proceeds to undertake home improvements which should increase the value over time. 

Demographic Tailwinds

Even before the pandemic, millennials were buying homes and boosting housing demand.  With homeownership rates rising around age 30, the millennial buyers are likely to increase.  The baby boomers have long been the largest demographic group but, watch out – the millennials are here.  While millennials are delaying the purchase of their first home, there are demographically greater numbers of millennials reaching prime home buying age.  Becoming a homeowner as a young adult can often be a foundational step toward future wealth accumulation.  With low rates, new hybrid work from home situations and household formations, millennials are likely to continue purchasing homes. 


Source:  CDC as of July 8, 2021.

Migration Trends

Goodbye California and Hello — Tennessee???   If you think Tennessee is a great place to live, you are in good company!  A line of U-Haul customers is ahead of you, too.  Tennessee posted the largest net gain of U-Haul trucks in 2020, making Tennessee the No. 1 U-Haul growth state for the first time.  Growth states are calculated by the net gain of one-way U-Haul trucks entering a state versus leaving the state in a calendar year.  Rounding out the top three was Texas and Florida.  Our neighbors North Carolina and Georgia came in ninth and tenth, respectively. 

Tennessee, Texas, and Florida all have no state income tax and are business-friendly states.  Many people are attracted to our lifestyle, low cost of living, climate, and the great outdoors. 

2020: STATES RANKED BY MIGRATION GROWTH

1.Tennessee (12)
2.Texas (2)
3.Florida (1)
4.Ohio (7)
5.Arizona (20)
6.Colorado (42)
7.Missouri (13)
8.Nevada (24)
9.North Carolina (3)
10.Georgia (16)
11.Arkansas (23)
12.Indiana (9)
13.Wisconsin (41)
14.Oklahoma (14)
15.South Carolina (4)
16.West Virginia (22)
17.Utah (8)
18.Kentucky (37)
19.Montana (26)
20.Minnesota (15)
21.Kansas (18)
22.Alabama (6)
23.New Hampshire (31)
24.Iowa (30)
25.South Dakota (28)
26.Vermont (10)
27.Delaware (21)
28.Virginia (39)
29.Maine (33)
30.Idaho (11)
31.Mississippi (25)
32.Nebraska (19)
33.Wyoming (27)
34.Alaska (17)
35.Rhode Island (35)
36.Washington (5)
37.North Dakota (32)
38.Washington, D.C. (38)*
39.New Mexico (36)
40.Michigan (48)
41.Pennsylvania (46)
42.New York (43)
43.Connecticut (34)
44.Louisiana (40)
45.Oregon (29)
46.Maryland (45)
47.Massachusetts (47)
48.New Jersey (44)
49.Illinois (50)
50.California (49)

Source: https://www.uhaul.com/Articles/About/2020-Migration-Trends-U-Haul-Ranks-50-States-By-Migration-Growth-22746/

Is it still a good time to own single-family residential real estate?  Given the strong demand, limited supply, large population of millennials, and the low payment relative to income, we believe this is still a great time to buy – with one qualifier.  Where you buy! 

We believe the Southeast is poised for continued migration by businesses and individuals.  Single family housing in growth markets may be emerging as a safe haven investment.  In addition to migration trends and new business bringing prospects to the area, there is a strong interest in tourism in the Southeast as well.  Popular tourist vacation areas like the Smokies and Blue Ridge are seeing record numbers of tourists and visitors to the national parks.  Vacation rental homes and investment properties in select markets may also present a unique buying opportunity.  Tennessee and neighboring Southern states are among the top-performing markets in the country and likely to continue. 

The opinions expressed in this commentary should not be considered as fact. All opinions expressed are as of the published date and are subject to change. The information has been obtained from sources we believe to be reliable; however no guarantee is made or implied with respect to its accuracy, timeliness, or completeness.  

Acumen Wealth Advisors, LLC® is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Acumen Wealth Advisors, LLC® and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Acumen Wealth Advisors, LLC® unless a client service agreement is in place.

We are happy to announce Jill Green has partnered with Acumen Wealth Advisors as a Real Estate Strategist! She serves as a resource for inquiries and questions for clients who have complex real estate and mortgage transactions. 

Born and raised in Tennessee, Jill witnessed the opportunity and growth transforming the state into a sought-after real estate market.  She has taken the knowledge gained in a mortgage banking career of production and management to transition into real estate investment.  Jill’s understanding of the market, combined with her seasoned experience in building, renovating, and acquiring her own personal portfolio of long- and short-term rental properties makes her a sound resource for real estate.

For seven years, Jill served as Senior Vice President and Managing Director of Mortgage for Atlantic Capital Bank.  In this role, she was responsible for all aspects of sales, operations, and underwriting in residential mortgage.  Jill managed and developed correspondent relationships, product development, and analyzed and originated new residential mortgage loans.  Previously, Jill was a top-producing mortgage banker for 16 years at Regions Bank and earned the bank’s “Chairman’s Club” award seven times.  This award honors the top ten percent of associates across 16 states and is the company’s top annual performance recognition.  Jill has a proven track record of success building and leading a results-oriented team with knowledge of compliance and regulations.  Jill was responsible for due diligence, vendor management, regulatory exams, and ensuring employees and processes were compliant with established policies, procedures, and regulations.  Jill was proactive in driving consistency and efficiency by developing and refining operating workflows to meet rapid-lending timelines and implementing new technology to provide a better customer experience.  Jill developed and managed a portfolio of residential mortgages in addition to selling loans in the Secondary Market.  Through Jill’s exposure to real estate within the banking sector, she developed a keen aptitude stemming from her sincere interest, knowledge, and experience in the industry.  One of Jill’s favorite facets of the real estate sector is the collaboration and ability to form trusted partnerships with clients, employees, and industry partners. 

Jill was named to the 2018 Gold Club by City Scope Magazine and recognized as one of Chattanooga’s 30 Most Influential Business Leaders in Chattanooga. She is a multiple time Gold or Platinum Production award recipient endowed by the Chattanooga Mortgage Bankers Association.  Jill is a member of the Nashville Short Term Rental Association (NASTRA) and a Lee University graduate with a degree in Business.  She enjoys reading, purchasing and renovating real estate, entertaining, and traveling domestically and internationally.  Most important to Jill are honor, integrity, and relationships built on trust. 

Welcome to the team, Jill!

When considering real estate as an investment, there are two predominant questions to consider.  What is the best TYPE of real estate to own and is NOW a good time to invest?  We believe single-family residential rentals represent a growth opportunity for now and the future.   According to a Gallup Poll, real estate remains one of the most favored investment to Americans and has ranked in the top spot every year since 2013.[1]  However, it can be a barrier for most investors because it can be considerable work.  We believe residential single-family housing is an ideal real estate investment and an important method to diversify an asset portfolio. 

It is our opinion there will be continued demand for single-family homes, particularly in a strong market like Tennessee.  Opportunity exists to capitalize on price and location in a time when Tennessee cities are projected to attract more business and generate employment opportunities.  While the future is bright for Tennessee real estate, there are also numerous barriers to entry.  Unlike other investments, real estate is not a passive investment.  From tenant relations to rent collection to maintenance requests, real estate can be very time consuming.  Procuring the right real estate investment requires knowledge and contacts in individual markets, particularly in high growth markets.  These investments also require a strong overview of industry knowledge relative to local zoning and ordinances, boundary and surveys, covenants, restrictions, HOAs, and property maintenance.  Many good opportunities require some cosmetic updates and remodeling and can also require improvements after tenants vacate.  The many factors and complexities to successful real estate investing serve to eliminate many would be investors from entering.  Conversely, having the knowledge and resources needed to navigate those same complexities and barriers can set the stage for a great investment with the potential to generate great returns and appreciation.

To learn more about how Acumen can help you Invest Intentionally®, please contact us.

The opinions expressed in this commentary should not be considered as fact. All opinions expressed are as of the published date and are subject to change. Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. Investments in securities involves risk, will fluctuate in price, and may result in losses. The information has been obtained from sources we believe to be reliable; however, no guarantee is made or implied with respect to its accuracy, timeliness, or completeness.   It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. Comments concerning the past performance are not intended to be forward looking and should not be viewed as an indication of future results.

Acumen Wealth Advisors, LLC® is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Acumen Wealth Advisors, LLC® and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Acumen Wealth Advisors, LLC® unless a client service agreement is in place.


[1] “Stock Investments Lose Some Luster After Covid-19 Sell Off”, Gallup, April 2020

[2] “US Home Price Insights:  Through Nov 2020 with Forecasts from Dec 2020 and November 2021”, Corelogic, Jan 2020

[3] A Decade of Home Building: The Long Recovery of the 2010s | Eye On Housing

[4] From ‘Zoom Rooms’ to Chef Kitchens: Zillow’s Top 10 Home Trends for 2021 – Dec 10, 2020 (mediaroom.com)

[5] “More Remote Work Opportunities May Make Suburbs More Desirable”, Zillow Research, May 13, 2020

[6] “Single Family Rental: An Evolving Market”, Freddie Mac Multifamily, October 2018

[7] “Single-Family Rents Increasing Twice As Fast As Inflation”, Corelogic, March 2020

[8] “Q3 02 Single -Family Rental Investment Trends Report”, Arbor Research, Q3 2020

[9] “Where Is The New Class Of Investors Buying Single-Family Rentals?”, Forbes, Nov 2019

[10] “For 7th Year in A Row, More People Left CA than Moved In”, nbcbayarea.com, Nov 2019

[11] “United Van Lines’ National Migration Study Reveals Where and Why Americans Moved in 2020”, Unitedvanlines.com, January 2021

06/05/20 – During the first half of 2020, Acumen has spent a large amount of time assessing economic and financial market data – largely altered by the COVID-19 pandemic.  During this time, we have remained active to both decrease the risk within portfolios as well as remain opportunistic. Throughout our efforts to minimize risk exposure, we divested from one of our primary core bond components.  After taking a detailed look into the fund holdings, it became clear close to 90% of the exposure was through the mortgage economy.  More specifically, over 8% of the fund holdings were through commercial mortgage-backed securities.  We divested of the fund, not because the fund’s performance was bad, but because we began to fundamentally disagree with the thesis presented by its primary holdings.  Commercial mortgage-backed securities are a type of fixed income investment backed by mortgages on commercial properties rather than residential real estate.  The amount of exposure to commercial real estate is where we fundamentally disagreed with the strategy behind the core bond fund.

Rather than a typical lag, commercial real estate may be impacted earlier as businesses were closed and/or have higher operational costs due to occupancy limitations, enhanced focus on sanitation, security, etc.  These costs will result in many permanent business closures and subsequent vacancies.  The remaining businesses will likely seek rent renegotiations at lease expiration and pressure rental rates.  Numerous factors affect valuations of commercial real estate such as location, use, length of leases, etc.  One standard metric is the capitalized net income of rents.  The decline of market rents will create a downward pressure on property value.  Many retail bankruptcies and store closures have been announced such as J Crew, Neiman Marcus, JCPenney, and Pier 1.  Other retailers may have difficulty paying or go on a “rent strike”, as announced by The Cheesecake Factory in April.  The large vacancies will create a continued cycle of rent renegotiations.

Even before the onset of COVID-19, a monumental shift was taking place in the percentage of Americans who wanted to live in the city.  In a study performed by Gallup, presented above, 8% more Americans lived in big cities compared to the percentage of Americans who desire to live in a big city.  We believe this already trending change will be exacerbated by the outbreak of the Coronavirus, and the American businesses’ effort to blunt the financial and humanitarian effects by sending employees home to work.  Among the large corporations allowing employees to work from home remotely through the end of the year are: Visa, MasterCard, Alphabet, Twitter, Square, and Spotify.  These are some of the largest tech names in the world, and we believe our ever-growing reliance on products supplied by these companies will create a greater trend of de-urbanization.  Many employees have adapted to the work-at-home model and enjoy the additional time and flexibility and will not desire to resume their long commutes.

According to the U.S. Census, 5.2% of workers in the United States worked at home in 2017.  Kate Lister, President of Global Workplace Analytics, says, “Our best estimate is that 25%-30% of the workforce will be working from home multiple days a week by the end of 2021”.  Employees and employers both stand to gain from this model and the pandemic has pushed technology investments forward.  For this reason, we expect less demand for traditional office space.

Specifically, the COVID-19 implications on commercial real estate are massive.  The pace of the pandemic and the shutdown it created will have an impact on the way we live and do business in many ways.  Acumen believes the largest of these changes will come in the form of more American families moving out of the city.

To learn more about how Acumen can help you Invest Intentionally®, please contact us.

The Acumen Team

 

 

 

The opinions expressed in this commentary should not be considered as fact. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. The information has been obtained from sources we believe to be reliable; however, no guarantee is made or implied with respect to its accuracy, timeliness, or completeness. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Diversification does not protect against loss of principal.

 Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

 Acumen Wealth Advisors, LLC® is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where Acumen Wealth Advisors, LLC® and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Acumen Wealth Advisors, LLC® unless a client service agreement is in place.