Welcome to the New American Poorhouse Redux
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If you sat out the market rally, Barry Ritholtz advised investors to stop reading the doom and gloomers' take on Obamacare, hyperinflation, the goldbugs, the Chinese crisis, and the student loan crisis.
That's where I disagree with the estimable Mr. Ritholtz.
More debt, less buying power
The student loan crisis is going to affect housing for decades with those who have recently graduated coming out with an average of $26,000 plus in loans. Serious delinquencies, over 90 days without payment, have been steadily rising to over 6 million loan delinquents for a 17.5% rate. Despite many bankruptcy lawyers' belief that student loan debt should be forgiven in bankruptcy proceedings it currently isn't and probably won't be for the foreseeable future.
By July 1, the interest rate on federally subsidized Stafford student loans will double to 6.8% if a Congressional fix isn't passed. Some legislation has been proposed by Republicans that will tie student loan interest to the 10 year T-bill rate. That may work out initially for those who graduate soon but likely end up with higher rates for college grads four years plus down the road. Still, colleges will raise tuition rates no matter what Congress figures out.
This onerous debt burden is pressing grads to take anything that pays rather than wait for a job advancing their career path. A CNBC article opined the New American Dream for Millennials will soon be a part-time job, any part time job, and an affordable apartment. An apartment where they won't need a car...they can't afford those either.
A stunning infographic of some of the effects of rising student loan debt included the statistic that at least 29% of respondents said they have postponed buying a house and even sadder, 15% have put off marriage plans. Here is another link to some illustrative charts put out by the New York Federal Reserve.
Often unmentioned is someone with student loan debt may think they can swing a downpayment and a mortgage but depending on their debt to income ratio a bank may very well disagree. Put that together with the fact that most jobs these grads find will be in urban centers with expensive single-family real estate. Apartment living becomes the only option.
Bright lights, big city, little apartment
As I wrote before in Welcome to the New American Poorhouse, homebuilders will eventually feel the pain, especially those most exposed to the first time buyer market. But who will feel the pleasure... the apartment or multifamily REITs.
AvalonBay Communities (NYSE: AVB) is of particular interest because most of its holdings are located in the Millennial job hubs: New York/New Jersey, Washington DC metro, Pacific Northwest, and Northern and Southern California. The company operates 164 apartment communities in 10 states with over 45,000 apartments. The stock is down more than 15% from its 52 week high of $151.23 and offers a 3.30% yield. It has a forward P/E of 19.37.
It competes with Apartment Investment & Management (NYSE: AIV), also called Aimco, which has a quarter of the market cap at $4 billion but Apartment Investment promises better growth at a1.17 PEG to AvalonBay's 2.71. It also has a lower forward P/E of 12.62 with a slightly higher yield of 3.40%. Analysts are fairly divided between bullish and bearish but give a median price target of $32.00 for some 15% upside from Friday's close of $27.89.
On the downside, Aimco has more subsidized apartment exposure and more Sun Belt exposure. However, for the really strapped Millennials Aimco rentals are decidedly better than living above a storefront.
AvalonBay, while now the third largest apartment REIT after the merger closes between Colonial Properties and Mid-America Apartment Communities, has an advantage over thosee merged companies and Aimco. That is its shared purchase with Equity Residential (NYSE: EQR) of Archstone Enterprise from Lehman Brothers late last year.
AvalonBay will hold 40% of Archstone, the high-rent name among big apartment communities in urban hubs and it will expand AvalonBay's holdings in DC and Southern California. These Archstone projects in development will be very attractive to those Millennials as they have amenities like swimming pools, fitness centers, etc. Equity Residential will get four properties to AvalonBay's three.
The other advantage of the Archstone purchase is it skirts the southeast and Arizona. Unfortunately for Colonial and Mid-America they have a strong presence in the Sun Belt where Equity doesn't think the competitive landscape is profitable based on zoning environments allowing too much builder competition. Equity has been selling off properties in cities like Atlanta and Phoenix.
Equity is the largest apartment REIT with over 150,000 multi-family units in the US. Its properties are located in the hottest urban centers in 24 states. On valuation it may be the best bet at a10.52 trailing P/E with the lowest price to book of 1.89 compared to AvalonBay at 1.91 and Aimco at 4.90. Its yield, however, is a yawn for a REIT at only 2.90%.
Analysts have a median target of $62.50 on Equity for 15% upside or so from its June 21 close at $54.73.
The trend will be your friend in time
Homebuilders have likely been overbought while multifamily REITs have been oversold. As the Millennial lifestyle plays out this trend is certain to reverse course.
Realtors may be pleased housing prices are rising but that euphoria won't last when an entire generation postpones indefinitely home ownership. I agree with Fellow Fool Mike Thiessen who wrote, "The consensus opinion from industry analysts is that apartment supply will remain tight for the foreseeable future."
The student loan crisis isn't going away and Millennials will have to move where the jobs and the apartments are. That leaves Equity and AvalonBay in the best positions with Aimco running third despite a better analyst growth prediction.
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