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Single-Family Home Rentals And The Rise Of Large Landlords




By Harrison Miller

October 28, 2022

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Large corporate buyers and new financial instruments are driving change in the single-family home rental market.


The steep drop in September home sales reported Wednesday steered attention to the housing recession, adding to expectations of a broader economic malaise. Real estate players of all sorts are battening hatches as inflation pressures and rising interest rates gnaw into home prices and demand.


Among the groups to watch as real estate pulls back is a new investor class in the single-family home rental market.


Institutional landlords, major players for decades in the multifamily space, are now exerting an increasing influence in a number of the U.S. markets for detached single-family homes. In a landscape where rental homes were traditionally owned by individuals or small businesses, these newer players are larger real estate corporations. At the top of the heap are publicly traded names such as Invitation Homes (INVH), American Homes 4 Rent (AMH) and Tricon Residential (TCN) — each of which owns tens of thousands of rental homes.


The New Single-Family Home Rental Market

Institutional owners still comprise a relatively small portion of the overall market, about 350,000 units, or 1.5% of the existing 23 million single-family home rental units, according to the National Rental Home Council. But in certain target markets, the concentrations are much higher.


For real estate sellers, this represents a vast new pool of buyers, backed by securitized bonds enabling them to pay cash to bypass wieldy mortgage-lending hurdles. Among smaller landlords, the institutions represent a tough new competitor, in rental markets as well as in the purchase of new properties. For traditional homebuyers, the rise in cash-rich competition often means fewer available homes and higher bids on those available.


For renters, the impact remains uncertain. At one end of the scale, the industry contends that the influx of single-family home rental stock means more and more attractive rental opportunities. But those properties come at a price, with monthly rental rates often at or above monthly mortgage costs. And because it appears that, in many cases, the most vulnerable, lower-income communities are most directly targeted by institutional buyers, questions are growing about how rents, evictions and foreclosures could play out under this new management.


The Rising Institutional Landlord

For regulators, the institutions represent a new layer of oversight challenge. Factors such as securitized borrowing and high-speed online buying combine with bulk sales from both government-sponsored entities led by Fannie Mae and, just recently, national homebuilders with surplus housing inventory, to further stack the deck against the already underdog first-time homebuyer.


North Carolina's Charlotte Observer detailed one case in which an institutional buyer paid a 12% premium to the seller's asking price — tough to compete with for most working-class home shoppers, and hard to refuse even for community-minded sellers.


These sorts of questions prompted the House Financial Services' Oversight & Investigations committee to hold a June 28 hearing titled "Where Have All the Houses Gone? Private Equity, Single Family Rentals and America's Neighborhoods."


Individuals, and individual investors who own one to four properties, make up the bulk of America's homeowners. The national homeownership rate, or the proportion of homes that are owner-occupied, stood at 65.8% in the second quarter of 2022, according to Census Bureau data. That's down from 67.9% in Q2 2020, which was the highest level since the third quarter of 2008.


Before 2008, investors with five or more properties owned about 10 million single-family rental homes, according to information presented in the House report. That was a bit less than 8% of the 129.64 million single-family homes late in 2007, based on Census Bureau data. Until 2011, no single investor in the country owned more than 10,000 properties, the House committee reported.


Large Buyers Take Advantage Of Crises

By the end of 2021, Tricon Residential owned 29,000 single-family home rentals, primarily in the U.S. Sunbelt. That was up from about 11,860 units in 2018. Invitation reported owning 80,000 homes in 16 markets, largely unchanged since the end of 2018. American Homes for Rent owned 57,024 properties in 22 states, up from 52,552 in its December 2018 filing.


While the overall number of homes owned in some cases may not change a great deal, that masks the fact that homes are constantly being sold off in securitized packages. Those securities, backed by single-family home rental properties, generate the capital used to buy additional homes.


Corporate ownership of single-family home rentals rose 3% a year starting in 2010, the House Committee said in its June hearing. Over the past decade, purchases by buyers owning five or more properties ranged from 15% to 17% of total single-family home sales, according to market research firm CoreLogic. Since 2017, such investors have purchased about 1.1 million homes each year.


Large investor purchases rose dramatically after the start of the pandemic. Buying by owners of five or more properties reached 24% of all single-family houses sold nationwide last year, CoreLogic data showed. The purchases peaked in February 2022, spiking to 28% of total single-family purchases. That was the highest monthly share since 2011, in the buying frenzy that followed the housing meltdown of the Great Recession.


In March, the Federal Reserve launched its monetary tightening program, aimed at bringing down inflation. It ramped its rate hikes higher in May through September. That has driven mortgage rates higher, with a 30-year fixed-rate loan now near 7%, more than double the year-ago levels.


Consumers Under Increasing Pressure

But concerns about higher housing prices were already prevalent. Home prices began backing off in July — the first monthly dip in nearly three years.


Rental increases that had lulled between 2% and 4% per year rose above 5% in April 2021 and topped 12% by the end of that year, according to CoreLogic's Single Family Rent Index. In April 2022, just after institutional purchasing in that segment peaked, rents grew 12.9% year over year.


Consumers were clearly under pressure from multiple angles. A Freddie Mac consumer sentiment report for August showed 96% of respondents indicated that price increases (of all sorts) in the past 12 months had affected their household spending. They were saving less, delaying essential and nonessential property repairs, and searching for roommates to share costs.


Purchases by larger landlords slowed slightly, falling to around 20% of total detached single-family sales as of June, according to the most recent CoreLogic data available.


But the run-up in home prices made homeownership even more unattainable to many. A full 68% of respondents said they were less likely to buy a home than they were a year earlier. Only 32% were more interested in purchasing a house in the current market, survey data showed.


"People at the age that we would typically expect to see buying their first homes are increasingly being priced out and continuing to rent," said Zillow senior economist Nicole Bachaud. "We are seeing builders increasingly focus on the rental market in reaction to this dynamic,"

Securitizing The Single-Family Home Rental Market

Housing markets in the Sunbelt — throughout the Southeast, Southwestern and Western U.S. — have been favorite target markets for institutional buyers. Much of that focus was on communities that experienced high foreclosure rates during the 2008 financial crisis, the House report notes.



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View source version on investors.com HERE

https://www.investors.com/news/single-family-home-rentals-rise-of-large-landlords/

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