Looking at Long-Term Housing Demand & Financing: Trends and Strategies

While many residential real estate investors closely scrutinize every deal they consider, not as many keep an eye on big picture trends. This long-term view is important, but not only for the professional real estate developer that finds greater demand from specializing in a growing niche. It’s also valuable for the limited-partner investor that wants to reduce risk by focusing their due diligence on a few types of projects.

At iFunding, we consider these trends when exploring projects to offer our investors. You can see that type of assessment where investments include condos built in mid-sized cities with growing tech/finance industries, and where starters and rentals are built for younger professionals, who view housing more as a service to lease than a lifetime mortgage to hold. You’ll also find the big picture view in mobile park home investments, suited for the service economy’s lower paycheck holders, and in lifestyle communities for the more affluent retirees.

This article touches on these long-term trends, including the residential shift to “echo boomers,” regional migration, and new sources of financing for homes.

From Retiring Baby Boomers to Changing Echo Boomers

An aging population will mean adapting existing homes for disability, where the owners wish to age in place. Others will want to move to convenient, low-maintenance communities which offer townhouses and condominium apartments, which should increase dramatically for this group as well as for the young who are just starting out.

The increasing demand for rental housing should continue through 2020 as Echo Boomers, those born after 1990, form new households. The trend towards job-hopping rather than the long careers of the Baby Boom generation favors the flexibility of renting, and Echo Boomers will likely be better educated, particularly women, which will mean a higher average financial position for this generation in the long-term.

After 2020, it is expected that this cohort will move toward home ownership, absorbing some of the single-family houses released by retiring Baby Boomers. Smaller houses will better fit the needs of the smaller households with fewer children that Echo Boomers seem to prefer, although the increase in minority home ownership, with higher average family sizes in some cultures, will offset this trend somewhat.

Home ownership remains the preferred housing choice until then, even among the Echo Boomers, with walking access to civic services a priority for many. As the economy recovers and credit balances return to manageable levels, we should see younger owners lead the remodeling market as they adapt older units to contemporary standards for sustainability and lifestyle. Investors will see this frequently in “infill” projects, where existing tracts are upgraded or rebuilt from the ground up, while benefiting from the historic ambience and/or small-neighborhood feeling of a particular area.

Locations for Growth

Although the “March to the Sunbelt” should be supporting a strong housing market, it is here that the bulk of the foreclosures occurred. As the recovery continues, the Sunbelt should see the highest demand for remodeling and renovation, as units are brought out of foreclosure and upgraded for resale.

Large cities offer many opportunities for renovated housing, including the conversion of vacated industrial buildings to desirable apartments. Smaller cities and towns with viable commercial areas, especially near transit stations, are also promising locations for housing renovation and replacement. However, the local job market is of paramount importance in making any investment decision, as the great burst of new construction and energy extraction activity in North Dakota–otherwise inexplicable–makes clear.

The Future for Mid- to High-End Single Family Homes

A segment of larger, free-standing suburban homes may decrease in value, as Baby Boomers release them for something smaller and easier to maintain. The Echo Boomers won’t be ready for such big houses for a while, and they have so far shown a hesitation about the isolation of suburban living, preferring the civic bustle of even small towns. Highest-value luxury homes, however, are in a class by themselves, and there is little reason to expect a decline in demand for them. There have been signs that tastes in recreation are changing, however, and that golf course developments, for example, may have trouble holding their value. Individual Investors and Family Offices becoming a new Financing Base As the US government explores way to change and reduce the roles of Fannie Mae (FNMA) and Freddie Mac (FHLMC), the private credit sector will play a larger role in providing credit to the nation’s housing market. Since 2008, much of the foreclosed/bank-owned housing stock has been purchased by hedge funds. Because the opportunities for the largest investment returns rebounding from the 2008-2010 housing implosion are diminishing, these hedge funds are now purchasing fewer of the remaining houses on the market. Demand is shifting back to individual home purchases, who are sticking with their planned housing budgets and looking for value more than ever.

This trend implies that the refurbishment efforts (which some call “fix-and-flips”) of individual real estate operators and modest-sized companies remain key for housing investments in the mid-term. However, not any type of house will do. It’s best to focus on housing trends like the ones above, pointing toward specific regions and cities, rentals & condos for young professionals, community living spaces for an older generation. Beyond flipping homes, other operators will find that running long-term rentals building – 1-4 family units, and apartment complexes – is the best way to develop a core competency while generating long-term income.

Meanwhile, the financing for such ventures needs to come from somewhere, if not the government –backed mortgage securitization agencies. Crowdfunding will be one of those fast-growing funding sources, in iFunding’s opinion. Our research into research about crowdfunding activities show that crowdfunding across all industries is growing 85% year-over-year, and is likely to reach $10bn in investments by 2017. Meanwhile, real estate has become the largest market for “private securities, publicly raised” (i.e., crowdfunded), with $60m raised so far in 2014, according to research firm Crowdnetic (http://www.crowdnetic.com/reports/sep-2014-report). Of $150bn in worldwide real estate transactions of all kinds (not just crowdfunded) in a recent year, $25bn were funded by accredited individual investors. Now, with regulations expanding access to non-accredited investors, we expect to see even further growth in crowdfunding. As a result, we recommend that investors familiarize themselves with crowdfunding by ‘dipping their toes in’ with modest early investments.

Sources:

U.S. Housing Trends: Generational Changes and the Outlook to 2050. John Pitkin and Dowell Myers, 2008

The US Housing Stock: Ready for Renewal. Joint Center for Housing Studies of Harvard University, 2013

Housing an Aging Population: Are We Ready? Center for Housing Policy: Barbara Lipman, Jeffrey Lubell, Emily Salomon, 2012