It’s no secret that we are in the midst of an affordability crisis within the housing industry. Since the start of the pandemic, things haven’t been the same; house prices are high and mortgage rates are also high. For some, the thought of one day owning a home is becoming increasingly remote, if not non-existent.
What do people do if they can’t buy a house? They rent one.
“Considering that the affordability crisis is happening in the U.S. right now, that’s going to benefit the rental market,” said Laurel Durkay, head of global listed real estate at Morgan Stanley. an interview with CNBC last week. She continued, referencing an earlier comment from the host: “So you said it went from the American dream to a utopia that does allow landlords to be able to fill this affordability gap.”
Institutional investors entered the single-family rental market in the wake of the Great Financial Crisis due to the large number of homes in foreclosure; they bought them cheaply in large quantities. And while it kept the housing market from bottoming out, they benefited immensely. Years later, they still benefit from it, only now because housing has become so unaffordable.
In the second half of last year, Ermengarde Jabir, senior economist at Moody’s Analytics, said FortuneFor investors, the single-family rental market is the ‘superstar of today and tomorrow’.
Jabir explained it perfectly at the time: people want to live in a house, they want a backyard, they want to be close to a good school district for their kids – and without the unprecedented and rapid deterioration in affordability, they might well have had that. “They want the traditional American dream, they may not be able to afford it, but they can afford it through renting a single-family home,” Jabir said.
And that doesn’t seem to have changed.
“I think the single-family rental market is going to be the most attractive right now, all things considered,” in terms of investment, Durkay said. She added that some areas of multi-family housing would also be considered a good investment, but due to a recent boom in multi-family housing construction, especially in the Sunbelt, rents have generally remained flat, or in some cases even fallen. Rents are still significantly higher than pre-pandemic levels, but according to Capital Economics, renting will be cheaper than buying for years to come, especially with home prices hitting record highs almost every month.
When it comes to landlords, they mean more institutional landlords (also called institutional operators or institutional investors; take your pick). Durkay mentioned Las Vegas REIT American houses 4 rent, which she said manages about 60,000 homes and is also a developer of single-family homes. “They were really one of the first institutional players to develop single-family homes exclusively for rental, and that gives them a multi-year runway of future growth that they’ll be able to take advantage of, and also really kind of help with this affordability crisis,” she said. “If you think about renting an AMH home, it is actually 25% more expensive to own a home in the AMH markets.”
She didn’t elaborate on that, but like that Fortune As previously reported, most estimates place institutional ownership at less than 5% of single-family homes and less than 1% of all single-family homes. However, that is not the whole story. First, Wall Street in Atlanta, a so-called desirable market, owns more than 4% of all single-family homes. It could be a major factor in rising housing costs.
Durkay later mentioned AvalonBay, a multifamily real estate investment trust and one of the largest apartment owners in the US. She said: “In the AvalonBay markets, the average home price is over $800,000, so the affordability of those markets is significantly lower than what you would expect. nationally…it’s about 95% more expensive to own a home in their markets than to rent.”
The point is, this is all great for investors and homebuilders. And while some argue that it’s also great for Americans because they can rent and live in the homes they want, they still rent because they can’t afford to buy. Owning your own home is a core tenet of the American Dream, and in today’s environment that is not so obvious.
