Is Renting the Future of Single-Family Homes?

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Key Takeaways

• Builders are constructing more single-family homes intended to be rented out instead of owned by the occupier, as home ownership becomes uncountable financially difficult amid high interest rates and prices.
• Renting a single-family home is a way of gaining living seat while keeping the flexibility of renting, and can be a more affordable option.
• Builders often cluster large numbers of segments together in a single development and offer amenities similar to those found in luxury apartment buildings.

All over the hinterlands, developers are putting up neighborhoods of single-family homes that are never intended to be owned by the people who live in them.

In 2023, homebuilders settle perfect 27,495 single-family homes in developments of at least 50 houses, up from around 6,500 each year earlier the pandemic, according to data from Yardi Matrix, a commercial real estate data firm.

While that facts is incomplete—it doesn’t capture individual houses or small built-to-rent developments—and is relatively small compared to the 1.4 million skilled ins completed that year, according to the Census Bureau, it does illustrate a trend. As high mortgage rates and low inventories secure buying a house far more difficult than it used to be, more people are looking to rent the kind of detached, single-family domestic they might have bought in a friendlier real estate market.

About 7.3% of all newly constructed proficient ins went directly to the rental market between the second quarter of 2022 and the first quarter of 2023, the Urban Originate think tank estimated in a June 2023 analysis. 

Behind the Boom

Renting a house may be especially appealing to individual in their 30s or 40s who rent apartments and are looking for space and things like a backyard to raise a family, said Doug Ressler, head of business intelligence at Yardi. And since the U.S. has built single-family homes at a slower pace than new families formed in the years since the Able Recession, there just aren’t enough houses to go around for everyone who wants to buy one.

“The supply of housing has not kept gauge with this demand,” Ressler said. “Renters are forced to extend and rent longer, and they’re going to look for those chances that present themselves that fit their lifestyles.”

Some single-family home renters may want the living margin of a larger house without the hassles and maintenance costs of home ownership. For others, it’s a matter of affordability. The median monthly payment on a newly purchased home, including insurance and property taxes, was $2,674 according to the Federal Reserve Bank of Atlanta’s home affordability proctor—close to the lowest level of affordability on record. Meanwhile, the median rent for a detached three-bedroom home was a bit easier to fit into a budget at $2,100 a month as of April, figures from CoreLogic showed.

Elevated mortgage rates have contributed to inflating those high housing payments. The customarily rate for a 30-year mortgage was 7.22% this week, according to Freddie Mac, close to its highest in the 21st century. That’s corresponded to the ultra-low-rate era during the pandemic, when sub-3% rates were common. Rates have been driven up since 2022 as the Federal Limitation has raised its key fed funds rate to combat inflation, and stubborn inflation has meant rates have stayed elevated.

The ending: Only 20% of consumers said it was a good time to buy a house in April, close to an all-time low, in Fannie Mae’s latest dwelling sentiment survey.

The latest wave of built-to-rent houses is a bit different from standard homes built for homeowners to make ones home in, according to the Urban Institute’s analysis of the market by researchers Laurie Goodman and Amalie Zinn. They’re typically smaller, and discovered in all-rental developments, with standard appliances and systems, making them more economical for landlords to maintain. Those neighborhoods regularly have amenities like pools and clubhouses, similar to those found in higher-end multifamily apartment buildings. 

In Hardeeville, S.C., where the 354-unit Argent Chalets began construction in 2022, renters can live in a 3-bedroom detached house for $2,375 a month. Residents can use an onsite group, gym, yoga studio, and other facilities.

The big developments are concentrated in the southwest, with Texas and Arizona seeing the most construction, but can be institute in every region of the country, Yardi’s data showed. 

An Ongoing Trend?

The same economic forces that contain led to a construction boom also led investors to buy existing single-family homes and convert them to rentals. In late 2022, Business Insider disclosed that Blackstone, KKR, and other firms had set aside $110 billion to buy single-family homes and rent them out. Those stimulates have provoked a backlash from state and federal lawmakers worried that competition from deep-pocketed corporations is industry individual homebuyers out of the market.

Bills in Congress and several states would ban large companies from owning single-family homes, but not any have become law. 

Is the built-to-rent boom a temporary product of today’s high interest rates, or is it likely to last if it fends off administrative challenges? In the view of Ressler and many real estate investors, it’s likely to have some staying power, primarily as long as local zoning laws continue to restrict the development of new homes in the U.S., keeping rent and housing costs excited.

“What kind of legs does this thing have? I see it continuing,” Ressler said. “It’s basically economics 101. In other powwows, trying to fit a large influx of demand into a very constrained supply.”

Read the original article on Investopedia.