The rate of home ownership in the U.S. has steadily declined since 2006. It has now reached a 50-year low, according to the U.S. Census Bureau. What does this mean for the growing industry of institutional investors in single-family rentals?
“The trend of declining homeownership is an opportunity for institutional owners of single-family homes. We expect homeownership to continue to trend lower until an eventual bottoming in 2018. The outlook for near-term rental household formation and subsequent demand for single-family rentals is favorable. In the long-run, a reversal in the homeownership rate is a negative for single-family rentals relative to apartments,” says John Pawlowski, senior associate at Newport Beach, Calif.-based real estate research firm Green Street Advisors.
Despite a drop in the homeownership rate, many U.S. households are opting to stay in single-family homes. The difference is they are renting instead of buying.
“They have not left single-family living, they have left homeownership. We just have not seen the tremendous influx into the multifamily sphere,” says Matt Vance, economist at CBRE Econometric Advisors.
As a result, institutional investors can still find attractive opportunities for single-family rental acquisitions in pockets of the country. “There are plenty of secondary and tertiary markets with room for pricing to grow,” Vance says.
Institutional investors took advantage of the housing crisis, buying foreclosed single-family properties in bulk, renovating them and then renting them out to meet existing demand. But they remain a minority in the single-family rental market. Institutional investors accounted for only 2.6 percent of all single-family home sales in the first quarter of 2016, down substantially from 4.0 percent in the fourth quarter of 2015, according to Steve Hovland, director of research for Irvine, Calif.-based investment management firm HomeUnion.
“We are forecasting more downward pressure on homeownership. The Midwest and Southeast still present great opportunities for investors. [But] buying in bulk will be more challenging,” Hovland says.
That’s because there’s been a shortage of new supply in the single-family rental space, sources say. Construction of new single-family homes remains below long-term averages, according to Vance. Many home builders were never able to re-enter the market after the housis crisis.
“Housing starts are still 50 percent below the 2006 peak,” according to Hovland. “Building now is [happening] in mostly class-A urban locations, as construction is extremely expensive; you can’t buy below investment replacement value like in 2011.”
According to Green Street’s Pawlowski, “The geographic footprint for institutional single-family rental owners is largely concentrated across the Sun Belt region, where single-family home prices are generally more affordable than coastal markets.”
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