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Proprietary Data Insights Top Residential REIT Searches This Month
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Even as they get hit with the rest of the market, there’s a reason The Juice continues to love high-end apartment REITs, two of which show up in the six most searched stocks in the category. We love AvalonBay Communities (AVB), Equity Residential (EQR), and Essex Property Trust (ESS) not only because of record-high rents, but because of another huge factor we back up with data in a minute. But first, those record rents don’t hurt. They only add to our bullishness.
Narrow it down to the nation’s most expensive markets, where AVB, EQR, and ESS have massive presences in luxury apartments, and the medians get even more insane. Source: Zumper According to Zumper’s September 2022 rent report, this is how much the typical one-bedroom goes for in each of the top 10 cities. Want a two-bedroom? It’ll cost you a median of $4,410 in New York and $4,170 in San Francisco, the only two places to cross the $4,000 mark. But if you think most people in these cities, particularly San Francisco, are struggling to pay rent, think again. These filthy rich renters may ultimately keep the real estate market from crashing. The Juice has the numbers on them next. |
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Housing |
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Filthy Rich Renters |
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Key Takeaways:
Thanks to The San Francisco Standard for this solid data it pulled from the U.S. Census. Source: The San Francisco Standard We recently explained why you’re unlikely to see a crash in the mortgage market. It’s because the vast majority of homeowners are locked in at low mortgage interest rates alongside record-high home equity. Even a 20% plunge in home prices would be a blip on the radar relative to the 2008 mortgage-driven housing crisis. Plus, logic dictates that as home prices come down, at least some renters will come off of the sidelines and morph into homebuyers, despite 30-year mortgage rates toying with 7%. Who Are These Renters? The Juice thinks at least some of them are the ones in the data you see above. Let’s dissect it. In San Francisco, roughly 35% of renter households commit less than 20% of their income to rent. Of course, some high earners struggle, as we’ll show you in tomorrow’s newsletter when we reveal the latest numbers on people living paycheck to paycheck in America. But tons of people paying outrageous rent presumably have equally as outrageous amounts of free cash flow. The median income of a renter in San Francisco is $98,241. Impressive. A not-very-out-there educated guess leads us to believe the people spending less than 20% on rent in a place where the median one-bedroom fetches three grand come in on the north end of that San Francisco median. If we’re correct, their income is closer to $150,000, $200,000, or more. In the conservative $150,000 scenario, they’re bringing home about $8,200 a month after tax. If they pay $3,000 on rent, this leaves a healthy $5,000-plus to pay for everything else and save. For at least a fraction of these renters, home ownership becomes an attractive option, even if it means leaving San Francisco. If you read the headlines, quite a few people have apparently done this. In a less expensive place, such as Indianapolis, where 28% of renters spend less than 20% of their income on rent, our theory is even more pronounced.
In Indy, the median income for all renters is around $38,000. However, high-income households make more – typically between $87,000 and $116,000. In San Francisco, the median home price last month was $1.3 million, despite a drop of 11.9% year over year. A 20% down payment requires $260,000, generating a monthly payment of just over $6,900. So buying a home there might be out of reach even for filthy rich renters. This is one reason many of them move. Even with much lower median incomes, the gap between the cost of renting and owning is much smaller. At 7% interest, the payment on a $240,000 home in Indianapolis – $1,597 – isn’t much higher than the median two-bedroom rent there. Calculate that number after factoring in a $48,000 down payment and the monthly payment drops to $1,277, pretty much in line with rent.
The Bottom Line: This data tells us that some renters are in strong financial positions, even in expensive places such as San Francisco. They have abundant cash flow. Maybe they’re stockpiling some of this cash as they wait for the right time to enter the housing market, be it where they live now or elsewhere. For every meaningful decline in home prices (and we all have our own subjective definition of meaningful) enough renters step off the sidelines and become homeowners, effectively acting as support (like the support level for a stock) for housing prices. At the same time, another financially healthy subset loves the freedom of and intends to keep renting, which will keep luxury rentals at premium prices, even if overall median prices start to decline. This is The Juice’s dual theory on why we don’t expect a massive housing market crash and why we love AVB, EQR, and ESS, and we’re sticking to it! |
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