Tightening Housing Supply

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In the coming years, an increase in Millennials forming households will create robust demand for both single family homes and apartments. Why inadequate supply over the long term may bode well for apartment REITs. The hunt for housing is heating up. In several U.S. regions, average houses spark bidding wars, apartments rent within hours and homes list at ever-escalating price tags. One driving reason: dwindling supply due to rising Millennial household formations.

Analysts say, “We’re going to see strong demand for housing, both multifamily and single family, over the medium to long term.” Aging Millennials, the largest segment of the U.S. population—are now forming households in increasing numbers, a trend that is expected to continue for at least the next five years. One question investors should consider revolves around why this coming imbalance between supply and demand may bolster both single-family home prices and multifamily rent growth in big cities and smaller towns. It may also open up some unexpected opportunities in apartment REITs for investors keen on riding this real estate wave, with the added bonus that apartment REITs tend to outperform during periods when the broader equity market draws down. Although multifamily and single-family housing prices are now past their pre-recession peaks, analysts say they don’t expect a housing correction in the next five years.

According to research, income levels and total housing supply are key factors, but the outsized Millennial population and household formation trends underpin a coming surge in demand. Builders have been working hard to keep up, but this population surge will eclipse their efforts. Research also forecasts that the growth of apartment stock will slow by 2019 to around 1% annually. Meanwhile, as new single-family homes continue to come onto the market, the existing supply is contracting, with 110,000 fewer homes on the market last year than the year before. Not only that, but research also found that apartment REITs could be a smart defensive tool for investors. Regardless of the pending population drivers, the report found that apartment REITs tend to outperform in times of equity market dips.

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