Will a Surge in Millennial Home Buying Threaten the Rental Housing Market?

Rising homeownership is adding to the jitters in the residential rental market, which has slumped recently after a long stretch near the top of the commercial real-estate industry. For most of the current economic expansion, declining ownership rates have enabled landlords of apartments and single-family homes to raise rents far faster than the pace of inflation. Demand has been fueled by the millions of people who haven’t had the money, credit or desire to pursue the traditional American dream. But amid a hot housing market, the homeownership rate is now rising, in part because millennials are reaching the age when they’re forming families and settling down.
The Census Bureau last week reported that ownership increased to 63.9% in the third quarter, the highest level since 2014. The rate was up from 63.7% in the second quarter and 63.5% a year earlier. It remains below the 69% clocked at the peak of the housing bubble a decade ago. Still, the recent trend is causing analysts and investors to wonder whether the rental market’s good times are coming to an end. Investors pumped tens of billions of dollars into the sector during the recovery, building and buying apartment complexes and amassing large portfolios of single-family homes.
One early warning sign came last week, when American Homes 4 Rent, which owns more than 50,000 single-family properties across 22 states, reported disappointing revenue growth for the third quarter. Analysts will be closely watching earnings from two other big companies with similar portfolios. Invitation Homes Inc. and Starwood Waypoint Homes, which agreed in August to merge, will both report results on Wednesday. “Up to now, there really hasn’t been a chink in the armor of rent growth,” said John Pawlowski, an analyst with Green Street Advisors.
To be sure, multifamily investors are not headed for the door. The homeownership rate is still well below the historic norm of 65%, and growth could be slowed by such forces as rising interest rates and the proposed tax code overhaul. A spokeswoman for American Homes 4 Rent said: “We believe our country’s cumulative undersupply of housing stock, along with shifting preferences towards rentership provides a favorable landscape for single-family rentals into the future.”
Still, the rise in homeownership comes as other forces weaken the rental market, including a surge in supply from developers hoping to cash in on rising rents. In September, the seasonally adjusted rate of apartments under construction was 596,000, nearly twice the long-term average of 300,000 units, according to U.S. Census data. Job growth also is slowing in some markets. That, coupled with new supply, boosted the national vacancy rate to 4.5% in the third quarter of this year, compared with 3.5% a year earlier, according to John Chang, head of research for real-estate services firm Marcus & Millichap. Nationally, rents were up 3.5% between the third quarters of 2016 and 2017, compared with 4.5% the previous years, he said. In many markets, developers completing new projects are offering concessions to woo new tenants, such as one or two months free rent. Lately, the trend has spread. Landlords in some markets are reporting that owners of previously built properties are also offering concessions.
During the early years of the recovery from the 2007-09 recession, shares of listed residential real-estate companies far outperformed the real-estate sector. Residential companies were up 40% in 2014, compared with 28% for the broader equity real-estate investment trust market. In 2015, residential companies and the broader REIT market were up 17.1% and 2.8% respectively, according to the National Association of Real Estate Investment Trusts. This year, as of the end of the September, the gap had narrowed to a 6.9% increase for residential versus 6% for the broader equity REIT sector, the association said.
Some multifamily investors are not too worried about rising homeownership, however, because new housing construction continues to lag behind the rate of household formation, even with the surge in rental housing development taken into account. Since 2010, household formation has outpaced construction by about 3.5 million units, according to CoStar Group Inc. But Wall Street is closely watching demographic trends, particularly marriage rates among millennials—a life change often accompanied by a shift from renting to owning. Millennials have been getting married later in life, often waiting until their late 20s, according to Mr. Chang, of Marcus & Millichap. Their marriage rate over the next five years will likely play an important role in demand for apartments and houses. “We’re at the leading edge of transition,” he said.

Citations

1. http://on.wsj.com/2zCyl2p – Wall Street Journal
2. http://nbcnews.to/2yF0RMo – NBC News

Spaceflight is Getting Seriously Commercial

Next year will mark the 50th anniversary of the first manned lunar mission, during which three Apollo 8 astronauts orbited the moon and gave the U.S. a decisive lead in its space race against the Soviet Union. These days, with NASA’s milestones receding in the national memory, Russian spaceships are the ones ferrying American astronauts to and from the International Space Station (ISS). If all goes well, that will change in 2018.
This moment is a big one for the handful of companies that have spent much more than a decade working toward commercial spaceflight. Boeing Co. and Elon Musk’s Space Exploration Technologies Corp. (SpaceX) are preparing to bring NASA scientists to the ISS by this time next year, not long after five teams race unmanned landers to the moon to win the $20 million Google Lunar XPrize. Richard Branson’s Virgin Galactic LLC and Jeff Bezos’ Blue Origin LLC have suborbital flights scheduled. Rocket Lab USA Inc. and Virgin Orbit, Virgin Galactic’s satellite arm, expect to begin launching satellites. And SpaceX plans to use its own astronauts to reprise 1968’s history-making flight.
NASA, for one, is counting on commercial efforts to succeed next year. Even unmanned tests of spaceships from SpaceX and Boeing “would be a major milestone in getting the U.S. back into launching its own astronauts into space,” says Douglas Messier, managing editor of Parabolic Arc, a commercial-space blog. NASA has not had that capability since it retired the Space Shuttle in 2011.
NASA’s Commercial Crew Program is targeting April for the SpaceX Dragon 2’s first test flight and August for a manned flight. Boeing is slated to test-fly its CST-100 Starliner unmanned in August and with a crew in November. The two companies have received a combined $7.9 billion in development money from NASA, including $6.8 billion in launch contracts to transport astronauts.
Sometime after its manned flight in August, SpaceX says, the Dragon 2 will make its moon-orbiting flyby with two paying passengers. The company won’t say how much those tickets cost, but the price is likely to be far more than the $40 million the last private astronaut, Canadian billionaire Guy Laliberté, paid the Russians to reach the ISS almost a decade ago.
Suborbital spaceflights, which breach the atmosphere but do not go fast enough to reach the continuous free fall of orbit, will be almost as important in 2018, says Charles Lurio, who publishes the Lurio Report, an industry newsletter. Blue Origin and Virgin Galactic are both testing suborbital craft (Blue Origin’s unmanned, Virgin’s with test pilots) and say they are aiming to reach manned zero-gravity flights in 2018. Those trips, Lurio says, “will start to give the first tangible idea of the potential market for suborbital flight.”
Satellite launches are a different story. Rocket Lab, which flew a suborbital test flight of its Electron rocket in May, says it plans to make its first flight to orbit in December and begin charging customers to put their satellites in space next year. Virgin Orbit has a similar timetable, and its cargo room is long gone, says Will Pomerantz, vice president for special projects. “Our manifest for 2018 is already fully sold,” he says, “as is much of 2019 and 2020.”
Citations

1. https://bloom.bg/2hhxJ71 – BusinessWeek
2. http://bit.ly/2iIzR8n – Space.com

The Good News Is . . .

• Americans’ confidence in the U.S. economy was positive in October, with the Economic Confidence Index (ECI) at plus 3 for the month. So far this year, it remains well above the mostly negative ratings recorded from 2008 to 2016. Weekly index ratings in October showed the varying degrees of confidence Americans had in the national economy over the course of the month. In early October, Americans’ confidence dipped into negative territory, for the first and only time so far in 2017, before recovering in subsequent weeks.
• Michael Kors Holdings Ltd., a global fashion luxury group, provider, reported earnings of $1.32 per share, an increase of 38.9% over year-earlier earnings of $0.95 per share. The firm’s earnings topped the consensus estimate of analysts by $0.50. The company reported revenues of $1.11 billion, an increase of 5.4%. Management attributed the results to an increased global presence and stronger brand engagement following the completion of its acquisition of Jimmy Choo.
• Panera Bread, known for serving soups and sandwiches, announced the purchase of its fellow bakery-cafe chain Au Bon Pain, pulling a staple of transit stations into a portfolio of companies that includes some of the biggest brands in breakfast. Au Bon Pain has 304 units worldwide, most with smaller storefronts than the 2,050 sit-down restaurants Panera operates. The acquisition offers Panera the strategic opportunity to grow in several new real estate channels, including hospitals, universities, transportation centers and urban locations, among others. Panera has a reputation for innovation. The chain also stripped high-fructose corn syrup from its salad dressings and most pastries as part of an effort to move away from processed ingredients.

Citations

1. https://bloom.bg/2eVhfSb – Bloomberg
2. http://cnb.cx/2lwnm3s – CNBC
3. http://bit.ly/2hq2Ocu – Michael Kors Holdings Ltd.
4. http://nyti.ms/2yMeT3e – NY Times Dealbook

Planning Tips

Guidelines to Help You be a Better Investor

Good investors understand how to set a plan and stick to it over time to grow wealth. They learn as much as they can to help them become better investors. But the best investors also have the self-awareness to recognize when they could benefit from having a fiduciary advisor on their team to provide guidance and help them navigate around their own blind spots. Below are some guidelines to consider for better investing. Be sure to consult with your financial advisor to determine which strategies are appropriate for your current situation and investment goals.
Link Your Investments to Your Goals – It is tempting to think there is one best way to invest your money. While certain strategies are better than others, there’s no universal solution. Using the investment strategy that is best for your specific situation means you need to evaluate your investments in the context of your goals. Start by asking yourself why you are investing and what you hope to achieve. The answer will inform how you should invest and help you if you are interested in being a better investor. Your goals dictate your asset allocation, your time horizon and your tolerance for risk. Therefore, examining what you want to accomplish helps you understand critical factors that determine where and how to invest.
Reassess Your Plan and Goals Periodically – However, life changes. Goals change. And when things change, you may need to update your investment strategy to reflect that. That does not mean tinker with your investments on a monthly basis. But it does mean you should take the time to review your plan each year and ask yourself if your investments still align with your goals. Each year, evaluate your strategy and ask questions like:
• When do I want to use this money I am investing?
• Has anything changed how I think about risk?
• Am I still diversified?
• Do I understand the holdings where I invest?
• What do I need to better understand?
These are important things to consider, but reviewing your investments does not mean you must make changes. In fact, sometimes the best action to take is no action at all.
Understand the Difference Between Risk Tolerance and Risk Capacity – You probably understand risk tolerance, the amount of volatility you can handle in your investments. With a high risk tolerance, you agree to accept seeing big swings in your portfolio. You are comfortable living with unrealized losses and confident in your ability to ride out market downturns without panicking. If you have a low risk tolerance, you know you do not want to deal with wild swings and lots of volatility, so you can invest accordingly. No matter what your risk tolerance is, however, it is not the same as your risk capacity. While risk tolerance is subjective, risk capacity is objective. It is how much risk you can actually take with your investments and that is determined by how much you need to meet your goals. Being a better investor means you understand that while you may feel completely okay with taking big risks, you know you can only take on so much risk as dictated by your goals.
Diversify Your Portfolios and Accounts – You already know the importance of asset allocation and diversification within your investment holdings that make up your portfolio. But do you diversify the types of accounts your portfolios live in? Investing in 401(k)s and IRAs is a good place to start. These accounts do limit when and how you can use your nest egg, however. Because you can only dip into these accounts (without penalty) at retirement, you might want to consider where else you can invest money to grow wealth for other important aspects and stages of your life before or outside of retirement. Again, you need to consider what your goals are. Then make sure your accounts are properly diversified to empower you to not just have the money for those goals, but the ability to access the funds you need when you need them.
Remove Opportunity for Human Error – Most average investors underperform the S&P 500. Why? Because the S&P 500 just tracks the market. It does not make decisions about what to do. It just does. Average investors are human and prone to making human errors driven by emotion. If you want to be a better investor, you need remove the opportunities you might have to make emotional, irrational decisions. Here are a few ways you can accomplish this:
• Set an investment strategy and plan based on your goals.
• Automate what you can, from your contributions to rebalancing.
• Work with an objective third-party who can help you stick to your investment strategy when you are tempted, in the moment, to deviate from it.
Citations

1. http://bit.ly/2zKKd2C – Forbes
2. http://bit.ly/2hZAX02 – TheBalance.com
3. http://bit.ly/2zwpnTx – Investopedia
4. http://bit.ly/2jhepuT – Kiplinger
5. http://bit.ly/2t6r4ks – US News & World Report