Episode 56: Live from AmeriCatalyst 2017 with Urban Institute Director, Laurie Goodman
Recorded at the AmeriCatalyst Conference in Austin, this episode of The Investability Podcast features special guest Laurie Goodman, Codirector of Housing Finance Policy Center at the Urban Institute. The show kicks off with a question of demand - does Laurie see any factors that would curb demand for rental properties? Quick to respond with no, she notes that while the projected rate of homeownership in the US is expected to slow, it’s still on a continued decline. Mortgage credit is still extremely tight, demographics are shifting in support of lower homeownership rates and the minority population is growing.
Given Laurie’s position at the Urban Institute, Dennis asked if from a policy perspective, there is new inventory being added for first-time homebuyers. Laurie remarks that while there are slow upticks at the high-end, the real issue is that builders can’t afford to construct affordable housing at the lower end. Building codes and zoning restrictions are causing lands costs to rise so much so that the National Association of Homebuilders estimates regulatory costs add on a full 25% to the cost of a home. Due to the locality of zoning and building codes, she doesn't anticipate a solution to this problem in the foreseeable future.
Dennis then asks about the future of home and rent prices. Does homeownership ever come back? Even though on a large scale, the US economy is adding jobs and seeing an increase in household formation, much of the population’s income remains swallowed up in rising rent, healthcare and education costs. Laurie discusses the supply effect, the total new supply of what’s being built in all housing sector minus obsolescence versus the rate of household formation. Because the rate of household growth is outpacing new inventory, she suggests there will be a continued upward pressure on home and rent prices. Even with rising home prices, less than 10% of the country has experienced yield compression.
The conversation then shifts into looking at institutional investors and the effects of Fannie and Freddie entering the space. What we can see in the recent wave of mergers is that net margin is compressing and while large investors begin using higher leverage, they still need to squeeze out costs. That said, the single-family investment space is still largely held by the everyday investor owning just a few or even a single rental property. While homeowners and investors continue to compete, home prices will still probably continue to increase due to lack of supply.
When asked about Fannie and Freddie entering the space, and Fannie’s recent billion dollar deal with Invitation Homes, Laurie says the two must think carefully of what their role will be in the space. Fannie was highly chastised for its deal with Invitation Homes, but did gain access to a large amount of data. The two firms will have to identify operators who fit their model and establish quality standards when underwriting these deals. With a host of possible issues, we can expect Fannie and Freddie to continue tip-toeing into the space. At this point, they aren’t able to clearly articulate their doctrines for funding large investment deals but the intention is to find out what they will tolerate as the enter SFR investing more significantly. While it's a boon for institutional players and potentially for middle market investors, what happens to the everyday investor? Laurie sees the goal being to learn from the institutions and adapt to the smaller investors. The show wraps up with further validation of the asset class, with projections of increasing home and rent prices. Both Dennis and Laurie agree it remains a good time to be an investor of residential real estate.