Too Poor To Own, Rich Enough To Rent - InvestingChannel

Too Poor To Own, Rich Enough To Rent

Proprietary Data Insights

Top Residential REIT Searches This Month

Rank Name Searches
#1 Invitation Homes 1,090
#2 Mid-America Apartment Communities 897
#3 Equity Residential 868
#4 AvalonBay Communities 799
#5 BRT Realty Trust 767

Source: Google Finance 

In today’s edition of The Juice, we pull from three key earnings reports to gather insights on the state of housing in America. 

A homebuilder. And two residential apartment REITs concentrated, primarily, in large, expensive cities. 

We’ll start with how these companies performed on the headline numbers. Then, we’ll dig deeper to help make sense of the current affordability crisis impacting homeowners and renters. 

PulteGroup (PHM). The Juice first covered PHM in April. The stock has returned just under 11% over the last month despite pulling back a bit this week on earnings.  

  • Q2 revenue grew 16.9% year-over-year to $3.93 billion, however it missed analyst estimates of $4.07 billion. 
  • Earnings per share of $2.73 topped the Wall Street expectation of $2.63. Good sign, as PulteGroup appears to be managing the effects of slowing demand well from a profitability standpoint. 

Essex Property Trust (ESS). The Juice first wrote about ESS in April. ESS is up approximately 8% over the last month, thanks largely to its earnings-related pop this week. 

  • In Q2, ESS generated revenue of $400 million, up 14% annually, and surpassing analyst expectations.  
  • Funds from operations (FFO) per share of $3.66 improved 21.1% from a year ago and came in higher than analysts anticipated. 

Equity Residential (EQR). We also first looked at EQR in April. EQR has returned about 7% in the last 30 days, most of it coming this week, as high-end apartment REITs regain favor in this extraordinary housing market. 

  • EQR reported Q2 rental income of $687 million, up 14.9% year-over-year, beating analyst estimates. 
  • The company notched FFO of $0.89 per share, up 23%, also beating estimates. 

Both ESS and EQR raised their guidance for 2022. This helps illustrate the divide between companies focused on renters, particularly well-off renters, and homebuyers. 

Scroll with us so we can explain.

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Too Poor To Own, Rich Enough To Rent

Key Takeaways:

  • PulteGroup says housing demand is slowing, however it’s a regional thing. 
  • This helps explain why Essex Property Trust and Equity Residential are doing so well. 
  • While buying a home might not be, renting remains in reach for high earners in expensive real estate markets. 


Now, The Juice uses these three companies’ earnings conference calls and presentations to piece together at least part of the story on the broad housing market. At that sweet spot where the rent versus own conundrum lies. 

Source: PulteGroup Q2 Earnings Presentation 

These numbers illustrate the situation nicely. 

If we can use PulteGroup to gauge homebuilder – and, subsequently, homebuyer – demand, things have slowed. 

However, as PHM President and CEO, Ryan Marshall, pointed out, it’s a regional thing: 

The more challenging demand conditions that developed in the quarter have continued through the month of July as the significant increase in mortgage rates has impacted consumers throughout the country. While all consumers are impacted by higher rates, we are seeing differences across our markets. Lower-priced markets in places like Florida, Texas, and the Southeast, areas of ongoing high in-migration are holding up better. Higher-priced markets are those which have realized outsized price appreciation in recent years have incurred a more meaningful slowdown in demand.

In tech hubs like Austin or in our Western markets in California and Washington, where prices routinely approach or exceed $1 million, sales bases have slowed as buyers struggle with a combination of elevated prices and increased mortgage rates.

From that, we can expect demand to continue to cool at PulteGroup. 

We can also understand why ESS and EQR both increased full-year guidance. 

They rent luxury apartments in high-end markets, including the tech hubs of Northern and Southern California and the Pacific Northwest. 

In these places, high earners might not be willing or able to buy a home due to high interest rates or the need for a hefty down payment. However, they do have the cash to drop on out-sized rents while they sit on the sidelines. 

As a result, revenue is up across the board for ESS in these frothy markets:

Source: ESS Earnings Press Release

Pretty much the same story for Equity Residential, which owns and operates luxury apartment buildings in the same markets as ESS, plus New York, Boston, the District of Columbia, and Denver. 

Source: EQR Earnings Press Release

EQR expects those healthy vacancy rates to stay steady at 96.5%. And, like ESS, it anticipates higher-than-expected growth in both revenue and FFO. 

The Bottom Line: If you plan to play housing via the stock market, you might be best off focusing on markets with high earners not quite able to afford home ownership, but more than able to drop a couple to a few thousand bucks a month on rent. 

It’s these – in some cases – paycheck-to-paycheck millennials who make big money to live well each month, but don’t have quite enough socked away to, say, drop five or six figures for a down payment on a million dollar-plus home. 

These people represent ESS and EQR’s target market.

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