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NEW YORK (
Equity Residential(EQR - Get Report) and
Altisource Residential(RESI - Get Report) may have similar names, but they offer two radically different approaches to investing in what some believe could be a long-term decline in U.S. home ownership.
As you can see from the chart below, U.S. home ownership levels have returned to where they were in the 1990s -- roughly 65% compared to a peak of above 69% in the second quarter of 2004.
The downward trend will continue for many years, argues Bill Erbey, chairman of RESI. (I'll call it RESI instead of Altisource to avoid confusion because there are three related companies -- all run by Erbey -- that bear the Altisource name).
"I'm not sure if we go all the way back to what it was pre-World War II, pre the [start] of
Fannie Mae and
Freddie Mac, which dramatically expanded homeownership, but certainly you're seeing probably half a percentage point or so of shift from ownership to rental on an annual basis," Erbey told me during one of several interviews for this
exclusive profile of the little-known billionaire published last week.
In case you were wondering, before the government created Fannie Mae in 1938, home ownership rates were below 50%. The fact that Erbey would even think about such a massive drop in home ownership is a signal he is predicting an economic and social shift way beyond anything anticipated by most followers of the housing industry. See
this interview (separate from the profile) for more of Erbey's views on housing.
Part of the rationale for Erbey's view is a belief that the ever-shrinking middle class will keep shrinking until we can retrain the U.S. workforce -- something that will take two or three generations at least. But Erbey is also concerned about more restrictive housing policy stemming from the 2010 Dodd-Frank financial reform legislation that will go into effect in 2014. He points to a
CoreLogic study in February which argues only 50% of the mortgages being underwritten today will qualify under the new standards for what will be known as a Qualified Mortgage.
Apartment REIT Watchers Take a Different View
One of the shortcomings of Wall Street analysis is that it can be very myopic -- or "siloed," in Wall Street lingo. So it is not surprising that when I spoke to three analysts who cover Equity Residential, the nation's largest apartment REIT, they weren't focused on the regulatory issue highlighted by Erbey at all. Erbey's companies -- there are five altogether -- have been classified by Wall Street as mortgage REITs, and the analysts who follow the apartment REITs belong to a different group.
They don't listen to Erbey every quarter when his companies deliver earnings. They don't attend the conferences he and his companies' managements attend. While they tend to agree home ownership may take a while to reverse its decline, they argue that's just because people were scared off by the housing crisis, or are increasingly living alone. They don't see anything nearly as monumental or long-lasting as what Erbey envisions.
The analysts' more moderate view of the future of home ownership may help explain why Equity Residential and other apartment real estate investment trusts (REITs) like
AvalonBay Communities(AVB) and
UDR,(UDR) have sat out the broad stock market rally in 2013. These analysts, as a group, play a critical role in helping shape the market's view of the apartment REIT sector. And that view holds that the present looks great but the future looks scary.
EQR data by