As we noted recently, single-family rentals are growing as a proportion of housing stock. While that’s good news for builders, rental agents, and REITs who specialize in this niche, not everybody is happy about the trend. It certainly is contrary to the interests of those who want to buy their own detached home with a yard and a white picket fence.
They’re no longer just competing with every other young family out there — they’re also competing with JPMorgan and BlackRock.
Wall Street, USA
From the builder’s point of view, there’s little if any difference between constructing a single-family house to buy and one to rent. It’s not like one is easier or faster or requires fewer skills and material. With homebuilders working flat out, there’s a capacity for only about 100,000 new units per month, so if more of them become rental units that means fewer become owner-occupied.
“D.R. Horton built 124 houses in Conroe, Texas, [then a] Who’s Who of investors and home-rental firms flocked to the December sale, according to the Wall Street Journal. Fundrise walked away with the whole neighborhood after winning the $32 million auction. “The country’s most prolific home builder booked roughly twice what it typically makes selling houses to the middle class—an encouraging debut in the business of selling entire neighborhoods to investors.”
Recent data from the National Association of Realtors bears this out. The year-over-year increase in the proportion of sales to institutions almost exactly matches the decrease in sales to first-time buyers.
While it’s telling that on average a full week on the market has evaporated, it’s also telling that last year’s four-month supply of single-family inventory has dwindled to 2.5 months.
And yet people — individuals, households, families — still want to buy houses. The NAR reports that, after a lockdown bust and a “new normal” boom, existing home sales are only slightly elevated compared to pre-2020 conditions — 5,860,000 units annually, seasonally adjusted. The price, though, is not-so-slightly elevated. The average existing home that cost $250,000 in 2017 is now going for $363,300. NAR data suggests that nobody is selling for under $250,000 anymore, but the million-dollar-plus market is up 147% over last year.
New single-family homes are selling at a seasonally adjusted annual rate of 676,000, according to the U.S. Census Bureau, with only a six-month inventory to burn through. This June figure represents both a year-over-year and month-over-month slowdown, right when we don’t need one. The median price of new houses — that is, the 338,000th out of 676,000 — was $361,800. The mean average sales price, though, was $428,700, no doubt skewed by the seven-digit bracket.
Less than meets the eye?
Is the financial community to blame for today’s single-family, owner-occupied housing shortage? To some extent, yes, sure. But not entirely. If you’re going to get down on Wall Street for being greedy, then you misunderstand the whole premise. As Chris Rock observed, “That tiger didn’t go crazy — that tiger went tiger.”
“Investors go where the yield is,” Jerusalem Demsas reports for Vox. “They are profit maximizers and face strong pressure to return large gains to shareholders. Want to stop them? Build more homes, ensure that they cannot have a large market share and engage in predatory behavior, and reduce the incentive for yield chasers to further commodify the market.”
Demsas also points out that institutional investors, even with the recent surge, play just a minor role in the U.S. housing market.
“While there are big firms for apartments and other multi-family housing units, there traditionally hasn’t been the same level of investment in single-family homes,” she writes. “And the main reason [buying single-family homes] has become so profitable is the preexisting housing shortage created by local governments and certain homeowners seeking to block new homes from being built, leading to a nearly 4 million home shortage nationwide.”
She cites a John Burns Real Estate Consulting study showing that only 20% of home sales were to investors in 2020, down from 29% in 2013. Meantime, the Urban Institute determined in 2019 that, of 80 million detached homes in the U.S., only 15 million were rentals — and only 300,000 of them were institutionally operated.
The latest in the Single-family Home Market
Even so, there’s no doubt that institutions have become more interested in the single-family market since 2019. But maybe they’re not the first-time homebuyer’s chief rival. Maybe that distinction belongs to the second-time homebuyer.
By “second-time,” we don’t mean trading up in this instance. We mean buying secondary residences. The Vox article points to a Redfin study that shows the demand for second homes has been outpacing that for primary homes for years. By April 2021, mortgage locks on second homes grew 178% year-over-year, while those for first homes grew by only — “only”? — 78%. Low-interest rates have something to do with this. If you’re already a homeowner and you’ve been making your payments on time, then you probably have a low cost of capital. In today’s market, mortgage money would be close to free for you. If you’d pay less in mortgage charges than you’d pay in mortgage fees, the fiscally responsible thing to do, other things being equal, is to buy a house, not a stock portfolio.
Nor is there any doubt that there is indeed a supply crunch. According to a New York Times piece, “many homes that would have typically come up for sale over the past year never did. Even in cities with a pandemic glut of empty apartments and falling rents, it has become incredibly hard to buy a home.”
The Times article cites an Altos Research study that finds, nationwide, the inventory of homes for sale declined by half in the past year. The dearth is even more pronounced in certain urban areas. There are typically around 50,000 homes — detached, duplex or condo — for sale in Chicago at any given time; at the moment, it’s more like 17,000. Cleveland, which generally has more than 8,000 addresses for sale, now has room for only 2,000 new homeowners.
While America was already constrained by both a housing shortage and a hard limit to how fast new units can be built, it’s the number of existing homes that might be driving the scarcity. Baby boomers are at once the people most likely to own a home and the people most vulnerable to covid-19. According to an economist cited by the Times, they are understandably reluctant to sell this year. This has a way of snowballing. If you’re a 65-year-old deciding to push off moving to The Villages and stay in your Missouri A-frame one more year out of health concerns, you’re reducing supply to the market and incrementally driving up prices. That might incentivize your high school classmate down the block to hold on another year as well just to time the market. Economists call this “a self-reinforcing cycle”.
One other factor is the public policy response to the pandemic. At one point, 4 million government-backed mortgages were in forbearance. While that program is soon ending — only about 1 million mortgages are still covered — this has likely kept homes off the market. Without that forbearance, though, millions of families might have had to dump their homes at fire-sale prices, so maybe it was impossible to avoid economic disruption in the housing market no matter what the government did or didn’t do.
If that’s the case, though, then this backlog will be hitting the market soon — “soon” to be defined by the delta variant. Meantime, builders are doing what they can.
“The number of single-family houses available for purchase grew by 3.8 percent from May to June, a change of tides after listings steadily declined during the pandemic,” according to Marcus & Millichap. “Specifically, the number of new homes for sale increased at the fastest pace month over month in more than 50 years.”
So there is hope. Not so much for homeownership to be affordable for the typical young, middle-class household, but at least there’s hope for a return to market equilibrium.