By: Neil S. Siskind
As Treasuries offer little in the way of yield and have downside risk to principal, today, Wall Street has been wrestling with how to re-define “safe haven”. It’s worth thinking about single homes as the closest thing to a “safe haven”. I’m not talking about a mortgage-backed security or other debt instrument secured by mortgages on highly-levered properties, I’m talking about single family home investment funds or REITS, or direct investments in houses.
You may be thinking that real estate crashes are a big risk- especially as high demand and low rates make things feel “bubbly” . But look at the single-family home rental market since, and following, the financial crisis, and since and from the pandemic. It’s been one of the things that got stronger in both these crises (Amazon, the business and the stock, also expanded in, and following, these events. I suppose one could say, “So goes America- so goes Amazon in the opposite direction”).
The thing that makes single family homes such safe investments is that they do well in good and bad economies. This assumes that any bad economy is caused by something other than a housing crash or crises, itself. Historically, economic slowdowns, recessions, and depressions are caused by rising interest rates due to “good” inflation (rising wages and rising demand). The low interest rates that follow a Fed-induced slowdown (by hiking interest rates), combined with higher bond yields due to inflation, the usual causes of a slowdown, is a good time to buy a single family home, because both prices and rates are low at the same time due to a bad economy. Low interest rates due to a stock crash and a resulting economic crisis, or due to a pandemic and an economic crisis, mean a weak economy. As interest rates and bond yields go lower to counter or stimulate a weak economy, that can be a good time to buy homes, as in 2009-2019, and like now.
It is highly unusual for a housing crisis to cause a weak economy. Clearly, it happened in 2007. But this was actually a financial event, not a housing event, as financial markets and financial instruments allowed for the housing bubble to expand until it popped.
Single family houses in decent neighborhoods will either appreciate in value, maintain their value, or throw off yield (rent)- depending on the economy; just as they have, pretty consistently (save for the 2007-2009 period for the reasons stated above) since the 1950’s.
A future housing crash is unlikely, since well-funded, long term investors are now a large part of the single family market. And as well-financed corporate investors are, now, in these markets for the long-run, due to structural changes to the economy (persistently low inflation and low safe haven/Treasury yields), inventory available to homeowners is smaller- and, if the homes are in the right neighborhoods, such as those with good schools- the downside risk to rents (i.e. yield) is limited, even as interest rates rise- perhaps, especially as they rise and home ownership becomes less affordable and rentals are in greater demand (and there still is upside risk to value for well-located homes). If rates and yields rise because the economy is strengthening, with jobs and wages growing, this, too, provides upside risk to this market. And real estate is not liquid, like stocks, so, these investors can’t just bail from the asset on a whim. They’d have to sell other more liquid assets (equities, credit) first if they saw a market change on the horizon.
If yields rise for more ominous reasons, such as due to the growing debt and deficit, stocks and bonds are still more risky in such event than homes in good neighborhoods. Remember that certain stocks can rise during time of rising rates and yields “if” those rates and yields are rising due to growth and inflation and pricing power), and not only due to growth of the federal debt- which is bad for stocks “and” for bonds.
With all the low-cost debt capital, including that from private equity, in single family home markets seeking capital appreciation, with others in these markets seeking bond alternatives- more yield than a Treasury with principal protection- we may be witnessing one more structural change to the economy in addition to the many others we are living through:
The permanent use of single family homes as safe haven yield producing investments for Wall Street (private equity) and its clients.
In other words- as bond alternatives.