Rent Or Buy? Too Much College Debt Changes This Housing Equation

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The increasing use of school loans to pay for college, combined with the rising cost of such an education, is likely to have long-term consequences. That's particularly true in the housing market.

Too Much Debt

Too much school debt, ever rising school costs, and a still-struggling economy have led to increasing defaults on school loans. Defaulting on a loan isn't good for a person's credit score, and a bad credit score could effectively lock a person out of buying a home, even if they have a decent job. Moreover, even those with good jobs may be unwilling or unable to take on the expense of buying a house if they already have large school debts hanging over them.

New Homes are Hot

Newly built homes are selling well because of pent up demand. After the housing bubble, buyers vanished. The 2007-2009 recession made buying a home a risky, if not impossible, proposition, and those who could afford a home and get a loan didn't want to buy a depreciating asset.

As the economy has slowly improved, people are again looking at homes. Only, when everyone was fearful, institutions came in and bought up the cheap-end of the existing housing stock. So, as people are coming back to the housing market, they are forced to look more towards the new home market.

Demand is being further pushed by interest rate trends. Low rates make buying a home easier because mortgage costs are lower. With rates headed up, potential home buyers are looking to move more quickly then they might have to lock in a low mortgage rate.

The Builders

Lennar (NYSE: LEN) and DR Horton (NYSE: DHI) are the dominant names in the starter home market. The strength in this segment is clear from Lennar's recent results. For example, the number of homes that the company built and delivered was up 28% year over year in the first quarter. More impressively, new orders were up 34%.

Those new sales have increased Lennar's backlog by 82% based on the number of homes, but 105% based on the dollar value of those homes. So increasing prices are clearly helping the company's results. Although Horton's numbers aren't as impressive, they follow the same trend. Thus, both companies look to have a couple more years of good results baked in.

That said, Horton's earnings jumped from around a quarter a share in 2011 to well over $2 last year, and Lennar's advanced from around $0.50 to over $3.00. Those are unsustainable growth rates even if the growth story remains intact, for now. Despite a recent pullback, investors have quickly bid the shares of these two home builders up.

The risk is that the current sales boom is based on pent up demand and demand pulled forward by interest rate changes. If a heavily indebted age cohort delays home purchases across the board, demand could cool off. Conservative investors should probably avoid home builders, while more aggressive types should watch backlogs closely.

Renting a House

While school loans may stop people from buying a home, it probably won't alter the desire to live in one. That's where companies like Silver Bay Realty Trust (NYSE: SBY) and American Residential Properties (NYSE: ARPI) could shine. These two are among the companies institutionalizing the single family home market.

Silver Bay has a portfolio of around 3,400 homes across Arizona, California, Florida, Georgia, Nevada, North Carolina, Ohio, and Texas. At the start of the year, however, occupancy stood at just 50%, which is pretty bad. That said, it provides notable upside to the rent roll even if no new properties are purchased.

American Residential Properties only came to market a short while ago. It owns more than 2,500 homes in Arizona, California, Florida, Georgia, Illinois, Indiana, Nevada, North Carolina, South Carolina, and Texas. It also manages over 600 properties for others. As of March 31, the company's portfolio was 86% leased, which gives it a leg up on Silver Bay today, but makes acquisition driven growth more important.

Neither REIT is appropriate for income seekers, however. Silver Bay only just initiated a dividend, a token $0.01 a share, and American Residential has yet to make a dividend announcement. But, for those looking to get in on the ground floor of a new REIT asset class, these are two of the best options.

Nothing Changing, Yet

The recovery in home sales isn't going to change overnight. However, the indebtedness of the up and coming generation could become a big issue. Watch the home builders in case sales turn quickly. Meanwhile, single family home owners Silver Bay and American Residential may hold some appeal for those who think living in a home will still be alluring.

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Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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