We have written extensively over the past few years, detailing the strong underlying fundamentals of the US residential housing market. Over that time, homeowners have experienced tremendous price appreciation. In addition, they have had the opportunity to monetize home equity through mortgage refinancing – due to continued low interest rates. The strength in the residential housing market is one of the key reasons the economy has been able to rebound so quickly from the COVID crisis. In a nutshell, it is a good time to be a homeowner.
As in every market that has experienced strong price appreciation, investors will question how long it can last. As we have stated in the past, we believe that the US residential real estate market has the potential to be strong for years. Many factors have contributed to the increase in residential real estate values over the last several years. However, the primary driver of this market continues to be the historically low inventory of new and used homes for sale. Nowhere is this shortage more acute than in the market for ‘starter homes.’ As detailed in a recent Wall Street Journal article, “The supply of entry-level housing, which Freddie Mac defines as homes up to 1,400 square feet, is near a five-decade low.” This is not a situation that can be quickly reversed. This is one of the main reasons we believe that strength in the market will continue.
Starter homes are a crucial segment of the market that continue to experience tremendous demand. As detailed in the article, “Solo people heading up their own households are a growing part of the population. The number of one-person households in the United States doubled in the last 40 years, rising to 36.1 million in 2020 from 18.2 million in 1980. But, as the number of single people looking to put down roots is rising, the pool of available options is shrinking.”1 This segment of the market contains two of the largest demographic groups in the country – millennials purchasing their first home and baby boomers looking to downsize.
The supply of homes into this category will not be increased quickly. The majority of new residential construction is targeted at a different demographic. One that is demanding larger square footage and is willing to pay much higher prices. Unfortunately, to add to the problem, much of the existing supply of used homes in that category needs to be significantly updated. Len Kiefer, deputy chief economist at Freddie Mac is quoted in the article as saying, “We’re just not building that many [smaller homes], despite what you hear about ‘tiny homes’ and that sort of thing. There’s not that much new supply coming online, so the existing supply—which is aging—is fiercely competed over.”1 The combination of no new construction, aging current supply, and fierce competition will likely lead to continued heightened demand and prices.
At Aloha Capital, we lend to real estate investors and developers who are working to update and rehab the aging supply of residential housing in the US. While our market segments focus is not limited to starter home, our lending solutions are helping to alleviate some of these supply issues. However, as mentioned, the supply of updated and rehabbed homes that cater to the starter home market is at a five-decade low. This supply shortage is unlikely to be satiated in the next few years. This should continue to provide strong fundamental support for housing and continued demand for Aloha’s private lending solutions.
Steve Sapourn is an active real estate investor, Aloha Capital’s co-founder, and portfolio manager. At Aloha, Steve has overseen more than 1300 real estate investor loans in 35 states. He has managed alternative investments in a variety of asset classes for over 25 years. He has deep experience in designing low-risk portfolios that reliably outperform benchmarks. Over his career, Steve has served as portfolio manager for a Fund of Funds, where he analyzed hundreds of alternative investment strategies. In addition, he has developed and implemented quantitative trading strategies in the futures, stock, and volatility markets. Steve’s long and diverse career benefits Aloha’s investors.