“The run-up in home prices is good news for current homeowners but sobering for prospective buyers. Those looking to buy need to save for a down payment; and closing costs, which are much higher as home prices go up.
Add a rise in mortgage rates and the affordability challenge for first-time buyers becomes even greater” Dr. Frank Nothaft Chief Economist, CoreLogic
TOP STORY: A New Choice: Build to Rent (BTR)
The housing market has been a bit of a three-ring circus over the last 15 years, from boom to bust and back to boom, from thousands of homes languishing in bank-owned portfolios to a record low inventory of homes for sale. But renters have also faced a lot of disruption, and often for the same reasons.
Rental housing is broadly categorized as multi-family, buildings with five or more, even thousands of units, and single-family houses which usually include the relatively small share of units in two- three-or four-family buildings.
Moms and Pops
The big multifamily complexes are typically located in urban areas, owned by major corporations (insurance companies are big investors) and operated under professional management The single-family share of the rental market has grown in recent years to about 35% of the housing stock, but the owners have traditionally been “moms and pops.” These small investors might live in one unit in a two-to four-family or own a few single-family houses as a source of extra or retirement income. Eighty percent of single-family landlords own five or fewer units, more than half own only one or two.
During the housing boom homeownership rates reached near 70% so the reciprocal, rental rates, dropped and many investors and developers pulled back from the multifamily market. An average of 250,000 new multifamily units were added each year from late 1980 through 2008. That dropped under 100,000 in 2010. Meanwhile many Moms and Pops had sold their properties to owner occupants at boom prices.
Then Came the Crash
Between 2008 and 2012, six million U.S. homeowners were foreclosed out of their properties. So, at the same time the number of new rentals was shrinking dramatically, millions of households were newly in need of affordable shelter.
Enter Wall Street. The big money guys are never blind to an opportunity, and the portfolios of real estate owned (REO) confronting Fannie Mae, Freddie Mac, FHA, and private lenders would prove to be big ones. Bad loans had left lenders cash strapped and REO was costly to maintain and dispose of one house at a time. When the lenders decided they had to move their inventories in bulk, the hedge and private equity funds had their wallets ready.
Over the next few years, The Blackstone Group (which owns Invitation Homes), Brookfield Asset Management, J.P. Morgan Asset Management and a half dozen other companies bought hundreds of thousands of single-family homes and invested millions more in distressed loans, foreclosing on many. But conventional wisdom was they would soon tire of trying to manage thousands of scattered individual properties (although purchases were concentrated in certain metro areas hard hit by the crisis.) When home prices rebounded, they would take their profits and run. The worry was the effect on a nascent recovery should the firms dump their investments all at once.
Conventional wisdom had it wrong.
The firms found they could handle the new portfolios, (although tales from tenants throwing mud on their superior management claims abound). They not only have retained many of the houses they acquired from lenders, but several of the larger companies (Invitation Homes, American Homes 4 Rent) have bought portfolios owned by other companies and several new ventures have entered the market.
Rental income and the capital gains they get when they do sell are only part of their profit model. The companies are also securitizing their properties in the same way FHA and the GSEs do with their loans; bundling them as collateral for bonds they sell to other investors. This is now a $15 billion plus market. Three Real Estate Investment Trusts (REITs) backed by single-family rental assets have raised another $18 billion through initial public offerings.
The Rental Comeback
With the homeownership rate plunging through the Great Recession (it bottomed out around 62%) there were countless stories about the U.S. becoming a renter nation, and rental property become a hot investment again. About 700,000 rental units were added each year through 2016, but the Harvard Joint Center on Housing says these were predominately in large complexes. At the same time, with the recovery complete, and home prices again skyrocketing, single-family rentals were being converted back to owner occupancy, almost 300,000 in 2018 alone.
All of this meant that renters, whose numbers are, by all accounts destined to rise as Gen Z forms households, were being squeezed into fewer choices. Multifamily units generally mean vertical living, little access to outdoor space, and limited options outside of urban areas. Single-family rentals, still primarily a Mom- and-Pop thing, tended to be smaller and older and with a history of converting to owner occupancy when single family prices went on a roll.
Which brings us back to the Wall Street guys. When home prices recovered, they couldn’t earn the same return on their investment as when they were buying at fire sale prices. Moody’s says the single family rental companies went from purchasing about $100 million worth of homes per month in 2013 to $20 to $30 million in 2016.
Now, with demand for rentals high, home prices even higher, inventories of homes for sale at all-time lows, and older homes presenting maintenance challenges, institutional investors and major home builders have found a new way to grow their single-family portfolios. Rather than buy houses they are now building them; what has now become the rapidly growing build-to-rent (BTR) market.
Robert Dietz, chief economist for the National Association of Home Builders (NAHB) says BTR is a way to add single family inventory at a time when households are pressed to afford the costs of buying yet want more space and a single-family structure. He estimates BTR added about 12,000 single-family houses to the rental stock during the fourth quarter of 2020, 50% more than a year earlier and a total of 44,000 units during the year. However, it is the form rather than the numbers that constitute the real change.
OUT OF PRINT
The first 3-D printed home in the U.S. has made it into MLS. The house, in Patchogue, NY, has 1,400 sf of living space and a 750-sf garage on 14 acre. It includes three bedrooms, two full bathrooms, an open floor plan and is listed at $299,999. It was built on site by SQ4D, out of concrete using its Autonomous Robotic Construction System.
The listing broker says the home is priced 50% below comparable newly constructed homes in the area “and represents a major step toward addressing the affordable housing crisis plaguing Long Island.”
The company includes a 50-year limited warranty on its 3D-printed structures and currently has building plans being reviewed from New York to California. Symone Strong, Builder
Large, Well-Appointed Homes
Rather than individual houses scattered here and there, the single family companies are building (or having built) entire new rental communities. These are not small, entry level houses, but large and well-appointed ones. They are popping up everywhere and a lot of firms are getting involved.
AHV Communities plans to build 1,500 rental units across eight communities, including Southern California, Denver, and Seattle. The $500 million investment is on top of four communities either under construction or newly completed. Range Water recently launched an $800 million platform to build and operate single-family rental communities in the Sunbelt. American Homes 4 Rent Legacy Farms recently added 75 new homes to its existing 1,400-unit portfolio in the Salt Lake City market and claims it is close to being a top 40 new home builder. Long established major builders like Toll Brothers and D.R Horton have also switched some production into the leasing market. It is hard to find a real estate publication that hasn’t written about the emergence of BTR in the last six months.
A BRICK AND A BANQUET
Every year 530 million tons of construction and demolition waste end up in, U.S. landfills. What if the waste timber, concrete, and asphalt could be recycled into a new type of construction material? Redhouse Studio is trying to do just that, developing a biological process which combines sheathing, flooring, and organic insulation with mycelium, the organisms that create mushrooms. After the treated waste stews, it is shaped into bricks with the consistency of rigid insulation then compacted into structure-worthy material. Redhouse sees dual benefits in disaster areas, rebuilding from demolition waste. A bonus: mushrooms will eventually flower on the bricks, creating a source of food. Katharine Schwab, Co Design Newsletter
buyers affecting both the level of demand and consequently price. A home, regardless of its size or amenities, that has only one bedroom or one bathroom is going to suffer on the market because it may eliminate any interest from households with more than one or two members. An empty nester probably won’t want six bedrooms, but that configuration could be perfect for a multigeneratipnal family.
Land size can also increase value, especially if there is the possibility of splitting off a lot or building an accessory unit, but again a lot of buyers might not want to do or pay for the landscaping upkeep.
Like Fine Wine
Age and condition, which may go hand-in-hand, play roles in value as well. Newer homes often appraise at a higher value because their systems and appliances are generally in good condition, lowering potential repair and replacement costs. A 25-year warranted roof on a new home pretty much guarantees the owner won’t incur that expense, often in the five-figure neighborhood, for dozens of years while a buyer of an older home might have to budget for replacing it within a year or two. Older homes are more likely to have at least some deferred maintenance or require upgrades to utilize new technology.
Diligent maintenance and/or recent upgrades can mitigate the obsolescence that can accompany age, particularly where the improvements are to kitchens or baths. Nothing screams “old” like harvest gold appliances or pink and green tile.
On the other hand, age only enhances the value of some homes. Those built in the 19th or early 20th Centuries that are typical of their) era, Victorian, Greek Revival or Craftsman features, are increasingly rare. All things being equal —i.e., condition arid location—they can command a value that will belie their age. Ditto structures with any historical significance.
Build to rent is a growing trend in residential construction and this could pose greater competition for home buyers, especially those at entry level. Investors are building tens of thousands of single-family rentals, betting that demand will continue in the suburbs as home prices continue to rise. Landlords who own suburban single family rentals report record occupancy and fast-rising rents since the start of the pandemic, prompting a surge in build-to-rent projects. “Every institutional investor is considering this space,” Trevor Koskovich, of NorthMarq, a property deal adviser, told The Wall Street Journal
In recent years buyers have been willing to pay a premium for energy efficiency; new windows seem to be the most important factor. While still new, “smart home” features also appear to be increasing value where they are in place.
Then there are the intangibles. Factors that give a home Value that may reflect current tastes, generational and cultural differences, local preferences, or just “who knows.” An architectural style that sells well in one area, even a specific neighborhood, may be considered “strange” in another. Floor plan preferences can be generational—the desire for an eat-in-kitchen versus a separate dining room, a great room instead of a. formal living’ room—can limit or increase buyer demand. Some amenities may carry a high value for some—in ground swimming pools are the prime example—but will eliminate a big chunk of potential buyers.
Whether a new home or an old and well-cared-one, finishes can make a difference in value. Hardwood floors are generally valued more than carpet, solid countertops) outsell tile, conventional decor over exotic color schemes.
Sometimes a home just has a certain something that sets it above the competition and brings in a higher value. No appraisal will capture it, which can be problematic. If that market value (as was defined at the start of this article) doesn’t veer far from the norm, the basics, location, size, age, and condition will almost always prevail, providing a sufficient basis for an appraiser to justify why one or more buyers valued that house so highly.