The rise of generational homes and ADUs in the US

The rise of generational homes and ADUs in the US
by Brad Cartier, posted in Newsletter

Generational homes, or properties with accessory dwelling units (ADUs), have understandably become more popular over the years. The financial burden of a senior’s residence coupled with the isolation of a pandemic has families rethinking their living arrangements. And there are significant implications for investors.

Natalie Campisi of Forbes presented some interesting data last week on the rise of ADU properties:

  • In January (before the pandemic took hold), homes with ADUs were selling 1.8% (two days) faster than the same time in 2020.
  • In November 2020, that pace jumped to 26% (22 days) faster than 2020.
  • Homes with ADUs were selling 18% faster year-over-year in November.
  • The median listing price for homes with ADUs sat at $567,000 in November, up 14.5% year-over-year, and outpacing the overall home price growth rate of 12.7%.
  • Finally, the price per square foot of ADU homes increased to $183 in November, an increase of 16% year-over-year.

It’s not just financial and lifestyle choices boosting demand for ADUs. Job losses, remote work, and lockdowns have placed additional pressure on outside childcare. Mom and dad living in your basement 👴👵? Problem solved. And, it can provide an additional source of income if mom and dad don’t move in, as owners can rent out the units.

JD Supra put it best last week when they noted that:

So what is stopping people from building an outbuilding in their backyard and setting it up as an ADU? For most of America, the problem is outdated zoning laws…There are plenty of jurisdictions that have started looking at this, and amending their land use laws to allow ADUs. Forward-thinking urban planners, who adhere to new urbanist or smart growth principles, again included ADUs in planned development districts.

It’s an affordable housing play for municipalities. Increasing your density without adding more buildings is an easy win for affordable housing proponents looking to increase supply amidst sky-high demand for housing.

Freddie Mac and CoreLogic back in the summer released a data report on ADUs pointing to the growing trend of this type of asset class.

Number of ADUs offered in the US - Freddie Mac

Source: Freddie Mac

According to The Times of San Diego, the “new accessory dwelling unit virtual services come in response to increased public interest in constructing these units, triggered by the city’s Housing SD initiatives intended to make building easier, quicker, and less expensive.” 👏👏

More 2021 trends

It’s trend time! December typically marks a flurry of snow trends reporting prior to the close of the year, and last week was no exception. Starting with Realtor.com’s2021 Housing Market Forecast and Predictions, which outlined some interesting data points to consider as we move into the new year, starting with key 2021 housing metric predictions:

Realtor.com key housing indicators for 2021

Source: Realtor.com

Prices will go up, construction will increase, and interest rates will rise slightly by the end of 2021. Agree? Disagree? According to Realtor.com, the biggest trends heading into 2021 are quoted as follows:

Millennials & Gen Z: The largest generation in history, millennials will continue to shape the housing market as they become an even larger player.

Remote Work: A scan of real estate listings on Realtor.com in early 2020 showed that in the ten metro markets where they are most common, as many as 1-in-5 to 1-in-3 home listings mentioned an “office.”

Suburban Migration: With remote work becoming much more common, home shopping in suburban areas had a stronger post-COVID lockdown bounceback than shopping in urban areas, starting in the spring and continuing through the summer.

I always love to look at inventory, as that will act somewhat like a crystal ball 🔮 for price appreciation and sales volume into the future. Realtor.com continues to reaffirm an inventory shortage, which will generally help buoy real estate prices and keep demand high:

Although the housing market is healing and by many measures doing better than before the pandemic, inventory remains housing’s long haul symptom. There were an insufficient number of homes for sale going into 2020 in large part due to an estimated shortfall of nearly 4 million newly constructed homes.

Agreeing with Realtor.com’s predictions on rising interest rates is NextAdvisor and TIME, who last week put out a prediction piece on interest rates titled, Mortgage Rates Will Rise in 2021, According to 5 Experts. Here’s What That Means for You. Spoiler alert.

Why we invest

It’s always nice to see equities outlets like Seeking Alpha talk about the benefits of real estate investing. According to Larry Swedroe:

Residential, farmland and commercial real estate all performed well over the period 1991-2018, compared with traditional asset classes of stocks and bonds [🤗]…For investors seeking to diversify their portfolios beyond traditional stocks and bonds, the evidence supports including a broadly diversified (by type of real estate) allocation to real estate in your asset allocation plan, with the allocation taken from the equity portion of the portfolio. 

Also, interesting to see a major bank espousing the long-term benefits of physical real estate assets during uncertain times 🤔. For when that 0.5% high-interest savings account just doesn’t cut in anymore.

Paul Kiernan and Eric Morath of the Wall Street Journal (subscription required) reported on household income, noting that household net worth rose 3.2% in the 2020 Q3 to $123.52 trillion. This was primarily caused by the rise in equities and real estate prices according to the authors.

Finally, Diana Olick of CNBC picks up on similar data from CoreLogic, noting that in 2020 homeowners have seen their equity increase by 10.8%. That is equal to $1 trillion in equity, or $17,000 per homeowner.