Board Minutes from the Chairman: August 2022

Is the American Dream (Still) to Own a Home?

As a kid growing up, like many of my generation, I watched some of the classic sitcoms including Father Knows Best and Leave it to Beaver. Aside from the varied lessons learned from the Andersons and Cleavers, I carried forward a dream of buying my own home and while not necessarily within a community such as Mayfield or Springfield, I did make my first purchase, a condominium in San Francisco, in 1984.

Fortunately for me at the time, interest rates had dropped from a fed funds 1981 high of 21% to a more affordable 30-year fixed rate of just under 14%… not a misprint! Coincidentally, 1981’s rates were also brought on by an inflationary spiral contributed to by rising oil prices, government overspending and wage expansion… so today’s 30-year fixed rate mortgage of 5.41% actually looks pretty good! Interestingly, in 1984, the home ownership percentage was 64.5% and today is a close 64%. The balance of housing provided today is through multifamily and now almost equally through single family rental housing (SFR).

This edition of Board Minutes from the Chairman reflects on today’s choices of housing, be it rental or home ownership, and the continuance and evolution of the American Dream.

Since 1984, our population in the U.S. has grown by 100 million with the number of owner-occupied housing units increasing from 56 million to 84 million. While mathematically, this increase in housing units approximates the needed for-salehousing (given average household size) required to maintain home ownership equilibrium, a change has taken place as Millennials and Gen Zers (who make up close to 50% of today’s population) have had a declining participation.

We can attribute the reduced percentage of home ownership within these subsets to many variables including a delay in getting married, an increase in household formation compared to housing starts, home unaffordability (the average median U.S. priced home in 1984 was $79,900 vs $428,700 today), challenges in accessing financing, and the required down payments. Considering these points, it may be no surprise that a recent survey showed 82% of renters today view renting as a more affordable option than buying. Certainly, a combination of these variables has helped contribute to the decline of the younger generation’s participation in home ownership, but optionality has never provided so many alternatives for reasons to rent.

SFR housing now stands at approximately 14% of housing stock vs multifamily at 15%, with a majority of that SFR being owned by Mom-and-Pop investors. Going forward, institutions will likely realize an increasing percentage of SFR as they look to deploy more capital in both existing homes and the newly formed build-to rent (BTR) sector. Incidentally, this new BTR sector is allowing home builders to predictably continue building to satisfy the needed supply imbalances, as they are assured of their exit sale outcome from institutional capital partners.

While much negative press has been made about these institutional investors taking product away from individual home buyers, from a long run global perspective, this market clearing strategy may actually provide more homes for the end buyer. Knowing an additional pool of demand exists, builders can continue to deliver product to satisfy an enhanced renter experience for those seeking more space and amenities within a suburban living setting. For example, today only 11% of multifamily housing units offer 3-bedroom floorplans vs 65% of SFRs. Further, renters may be given the added option of having a first look to purchase their SFR, as ultimately, private equity will always need its exit.

Aside from the SFR dynamic, it is estimated that the U.S. now needs 4.3 million new apartments over the next 13 years just to meet projected demand with supply shortfall largely due to the legacy of the late 2000s financial crisis when development nearly came to a halt.

Owing to the many aforementioned demand trends, Buchanan’s rental portfolio now consists of approximately 2,400 multifamily units. Our acquisitions are based on the investment goals of owning primarily newer Class A product that is centrally located, architecturally well designed, highly ammenitized and catering to the many tenants who prefer to rent. For many, it seems the optionality to retain job mobility while retaining a high-quality housing experience trumps the need to make a home purchase decision.

To further our rental housing focus, we continue to actively provide much needed capital to developers and owners of multifamily for building new ground-up apartment projects, renovating existing product, as well as acquiring and adaptively converting limited-service hotels to workforce housing. In total, we have now financed approximately 1,250 units, with an additional 285 units in process as we continue to support investment activity that is in alignment with supply and demand imbalances within the housing market.

Home ownership in the U.S. peaked in 2004 at 69.2% as public policy influences and certain bank deregulation encouraged more mortgage origination with interest only and sub-prime loans. These incentives created a misaligned credit underwriting environment that ultimately caused the 2008 Global Financial Crisis, bringing home ownership to a low of 62.9%. Today’s home ownership rates of 64% seem more in line with past U.S. ownership history and moreover, today’s lending environment better reflects stronger borrower performance as we affirm today’s mortgage-backed securities high performance.

From my perspective, the American Dream is alive and well though with a revised script as we factor in the changing variables of work from home, extended life spans, the quality of a home to rent vs buy, alternative investments to home ownership and the greater availabilities of housing options today. Equally important in comparison to past housing markets is that entrepreneurship is forward thinking and capital is responsive to satisfying a variety of housing development be it market rate, affordable, homeless, senior care, student, veteran, and handicapped housing as we strive to offer the American Dream to everyone.

Best to all,