Student Loan Debt Has Just Become Everyone's Problem

It's no secret that student loan debt makes it harder for young people to get ahead. It turns out that their burden is even worse than we thought -- and, in fact, it's bad for anyone with a financial interest in real estate.

Surrender your diploma and all hope here
Since 2003 the numbers of students taking on debt has climbed from 25% to 43%. The graduating class of 2012 is looking at an average $29,400 in debt, up from $26,600 for the class of 2011.

Those debts are keeping young people from buying homes, cars, and even has couples delaying marriage and having children. In fact, for the first time in decades young people without student loan debt are buying more cars and houses than those with student debt. 

According to an April Federal Reserve Bank of New York study, "As a result of tighter underwriting standards, higher delinquency rates, and lower credit scores, consumers with educational debt may have more limited access to housing and auto debt and, as a result, more limited options in the housing and vehicle markets, despite their comparatively high earning potential."

A Federal Reserve infographic paints the bleak picture.

Source: Federal Reserve and AIPCA

But why should you worry? Unless you just graduated from college, chances are you don't have a $30,000 IOU looming.

Well, unfortunately the plight of Generation Debt has consequences for all of us, especially investors.

Bypassing the white picket fence
Economists are concerned that an entire generation of renters has been born. This is a disturbing trend for the housing market, with the National Association of Home Builders going so far as to say that it is dampening demand for new homes.  

We're already seeing the damage that this negative trend wreaks on homebuilders with the most exposure to starter homes, especially in suburban and exurban areas. Those homebuilders are KB Home and Beazer Homes .

Beazer Homes recently reported its first profitable six-month period since 2006. It also revealed that most of its new land spending, 70%, was concentrated in the Mid-Atlantic, California, Florida, and Texas.  Still, this homebuilder has almost no presence near some of the best job markets for Millennials: Austin, Denver, San Francisco, and Seattle.

KB Home is off considerably from its 52 week high of $25.14. The company does, however, have some exposure to these Millennial hubs, with communities in Denver, the Bay Area and Austin. It is a slightly better proposition than Beazer with a 0.60% yield and a forward earnings multiple of 13.29, but both builders have a high short interest of over 35%.

So, what about when these Millennials pay off their debts and become more established? Surely homeownership is in the cards someday, right?

It's complicated. Once upon a time the white picket fence was the dream, but now it's being cast as a prison. Todd M. Schoenberger, Founder of LandColt Capital LP, penned a controversial article for CNBC explaining why homeownership is for suckers. He cited rising mortgage and property tax rates and increasing costs of home maintenance should be deterrents to new buyers.

Millennials agree and have a sneaking suspicion that homeownership is a "sucker's paradise" after growing up with long memories of family job losses or money troubles.

How to cash in on "Generation Rent"
What's bad news for home builders and real estate agents needn't be bad news for investors. You've got options.

Playing to a generation of renters is the strength of AvalonBay Communities , a REIT owning 164 multifamily (apartment) communities located near metropolitan hubs.  Avalon Bay also benefits from some other Millennial trends: their exodus into urban centers where the jobs and public transportation are, tighter credit requirements for all homebuyers, and a reluctance to buy a home in an uncertain and rapidly changing job market. The stock is on sale now thanks to their latest earnings release, which revealed apartment rent revenue in the D.C. area had declined, mostly thanks to government cuts.

However, as CEO Timothy Naughton noted on the third quarter earnings call, their prime demographic of ages 21-35 continues to provide a tailwind with ~5 million individuals turning 20 in 2013. He added that housing supply in job hubs has been constrained and that, "Witten [Advisors] is projecting that 7 of the 8 outperforming markets in the 2013, '16 timeframe will be in AVB's footprint."

CFO Sean Breslin pointed to its Pacific Northwest and Bay Area properties, all of which are doing well and are expected to continue to do so thanks to the growth of tech jobs in the area. Breslin also reported that rent revenue was rising in NYC and New Jersey as those areas continue to be job destinations for ambitious Millennials.

AvalonBay's forward earnings multiple is 17.58  and offers a yield of 3.60%. It also has the highest growth potential with a low PEG of 2.63 compared to 11.06 at Beazer Home and 7.13 at KB Home.

This trend is your friend
For the foreseeable future the trend is much better for rental apartment housing, especially in the job hubs where AvalonBay has rental communities. Student loan debt will continue to spiral higher and adversely affect the influx of new homebuyers for years to come, as will a tight job market. With AvalonBay's stock at lows due to only one flat market, now is a good time to check in.