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Renting the American dream

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The recent boom in single-family rental homes, and why it signals a shortfall of starter homes in the market

A sign advertising a house for rent in Los Angeles in 2015.
A sign advertising a house for rent in Los Angeles in 2015.
AP Photo/Richard Vogel

The housing market contains numerous talismans and ciphers for those looking to predict what’s next. Housing starts, homeownership rates, and spreadsheets full of statistics can help unravel the intricacies of the market.

But one figure from the last decade shows how a confluence of trends are shaping the market in 2016, such as delayed millennial homeownership, the hangover from the foreclosure crisis, the potential rise of the sharing economy, and the steep jump in urban real estate. The rise of rental housing, specifically single-family homes, signifies many things, but more than anything, it demonstrates the difficulty in creating new, affordable starter homes.

According to an analysis of the Census Bureau’s American Community Survey by Dan Immergluck, a Professor at the School of City and Regional Planning at Georgia Tech, between 2007 and 2013, the number of detached single-family homes for rent nationwide jumped from 9.5 million to 12.4 million, a rise of more than 40%. While rental usually refers to apartments, millions are also paying for homes month-by-month.

“We often think of rental stock as multifamily apartment buildings,” says Dr. Andrew Aurand, Vice President for Research at the National Low Income Housing Coalition. “But 40% of the market is rental homes. It’s an important part of the rental stock, especially in the suburbs.”

The huge boom in this sector of the nation’s rental stock is actually an after-effect of the housing crisis, which created a glut of foreclosed homes that could be picked up for a steep discount. Eventually, larger institutional investors began collecting assets and renting these homes to make money, and their portfolios grew and expanded. Now, many big players, such as Invitation Homes, Colony Starwood, and Americans Home 4 Rent, control thousands of homes across the country, often concentrating in areas such as Florida, Atlanta, and Phoenix, where the housing crisis was most severe, and betting that rising rents and home prices mean more and more Americans will delay homeownership.

The market has settled down now that the number of foreclosed properties has decreased and the deals have mostly been scooped up. Before this temporary shift, the single-family home rental market was mostly controlled by independent, mom-and-pop operations. Now, with corporate ownership expanding, financiers have turned to high-tech solutions to handle huge property operations. Professional management tools that didn’t exist five years ago make it more appealing to rent. And there’s still slow, steady, room to grow; over the next 10 years, 10 million senior or retired homeowners will sell their homes or pass away.

“All the big players would say it was enabled by technology,” says John Burns, founder of John Burns Consulting, a firm that works with many of the big players in the industry. “If you saw what I’ve seen, you’d be blown away. These guys can figure out the value of the house and how much it should be rented for in 10 minutes with an iPad. Property management has also gone very high-tech, too.”

Single-family houses being marketed as investment properties on Roofstock
Roofstock.com

It’s not just about big players. Gary Beasley is CEO and co-founder of Roofstock, a company that created an online marketplace for smaller investors to buy single-family homes as investments.

“Investors are seeing that this market looks more like multifamily,” he says. “It’s more stable than investing in homebuilders, and it’s a real estate asset class that’s still below peak value.”

He believes investors of all sizes see a growing market with steady returns, a safer bet than the stock market. He’s optimistic about the future: millennials starting families still want to be inside a house, even ones they don’t own, and the turn towards more professionally owned properties make it easier to attract tenants.

“You pay for housing as you consume it, and never have to worry about the huge transaction costs,” he says. “I’m bullish on the need for the product. People are moving around more, and the ability to test out a neighborhood before committing is a huge advantage.”

Harvard Joint Center for Housing Rental Infographic
Harvard Joint Center for Housing Rental Infographic Rising costs have dramatically expanded the population of renters in the country

Is the growth in rental homes perhaps a sign the sharing economy is starting to change our perception of the American Dream? Beasley and others believe the flexibility and lack of commitment is a great selling point. But in many ways, it comes down to economics. This segment isn’t helping affordability—according to Aurand, low-income families would need more assistance to be able to afford and take advantage of the single-family home rental market. They’re filling the need for a product that’s increasingly harder to find.

According to a new analysis by Fannie Mae, during the same 2007-2013 period when the single-family rental home market was exploding, the available inventory of starter homes dropped by more than one million units. Those two shifts aren’t a coincidence.

Single-family rental homes, a bridge between a crowded apartment and a purchased house, are popular at a time when affordable starter homes are harder and harder to afford. According to Patrick Simmons, Director of Strategic Planning, Economic & Strategic Research with Fannie Mae, homebuilders have been slow to ramp up construction of starter homes, instead focusing on larger, higher-priced models with a better margin.

Fannie Mae

As the cost of building a home goes up, there’s been an overall decline in the supply of 2,000-square-foot models made for young families. In 2005, 40% of homes built that year were that size or smaller. In 2015, it was 32%. That’s making it even harder for today’s young adults, often burdened with credit and student loan issues, to become homeowners.

“A substantial number of young adults view ownership as making more sense than renting,” Simmons says, “and interest in homeownership is very high among young adults. But they just haven’t been able to do it.”

It’s a story that’s very familiar to any millennials scanning the property market and lamenting the high cost of a home: renting just makes a lot more financial sense right now. Statistics certainly bears that out. Burns says that while his research shows that homeownership isn’t dead, he believes the younger generation will achieve a roughly 10% lower homeownership rate than their parents.

Jonathan Spader, a senior research associate at Harvard’s Joint Center for Housing Studies, also sees the credit market playing a big role in pushing more people towards rental housing, as it’s harder for many to secure a loan for a starter home. He sees the rise in single-family rental homes as the story of a demographic facing increased hurdles to owning their own place, not some serious shift in attitudes towards ownership. For many, these homes offer an affordable option for moving to the suburbs, and into an area with good schools to start a family, when money for a downpayment is lacking.

Maybe the expectation of having your own home is, in a small way, being replaced by a desire to get more space and a better location—without the burden of a big upfront investment.