Record housing prices force potential buyers to rent out

Record housing prices force potential buyers to rent out

Landlords are in a good position as more potential homebuyers have no choice but to rent.

Steeper borrowing rates and high prices in the housing market are causing many buyers to give up. This is good news for owners of single-family rental homes.

Potential homebuyers face affordability issues that are likely to deteriorate before they get better. Sales prices of existing homes hit a record average of $407,600 in May, while sales declined for the fourth straight month. Mortgage rates have nearly doubled since January, helping to increase the average mortgage payment on new loans by $513 a month, according to the Mortgage Bankers Association.

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As this trend continues — the Federal Reserve has signaled it will continue to raise short-term rates to combat inflation — single-family landlords say they are in a good position because more potential homebuyers have no choice but to rent.

Rents for single-family homes rose 14% in April this year from a year earlier, the 13th consecutive month in which rents rose at a record pace, according to housing data provider CoreLogic.

"The more rates go up, the better for this business," Bruce McNailage, chief executive of rental home owner Kinloch Partners, said at an industry conference last month.

According to CoreLogic, the lack of affordable existing homes was also a contributing factor to the increase in rents. Home builders are also expected to give up on how much they build, with rising rates and a reluctance for homebuyers to pay, analysts say.

According to the Commerce Department, U.S. housing construction fell 14.4% in May from April. Meanwhile, a separate measure of trust in U.S. home builders fell for the sixth straight month in June to its lowest level in two years, the National Association of Home Builders said.

In contrast, 74% of single-family landlords surveyed by John Burns Real Estate Consulting LLC in May said they expect strong or very strong rental activity to continue over the next two quarters. That response has dropped from a high of 91% during 2021, but is still higher than sentiment was before the pandemic.

From desired residences to major commercial transactions.

Invitation Homes Inc., one of the largest home landlords, said earlier this month that its rental rates continue to rise at an even higher rate than last year during the first five months of 2022. Its homes are 98% occupied and the turnover of residents is at an all-time low, the company said.

"Demand is getting stronger and stronger today," David Singerlin, CEO of publicly traded American Homes 4 Rent, said at a May industry conference.

Small operators such as Mr McNalage say they have had similar success. "Because of supply and demand, we are raising rents by about 15%," he said, "which is lower than our peers in many areas."

However, this is not all good news for these companies, and some challenges are looming. Shares of three publicly traded rental landlords — Invitation Homes, American Homes 4 Rent and Tricon Residential — have fallen more than 17% since the start of the year, in line with declines in the broader stock market. Investors may confuse the fate of single-family rental companies with a slowdown in the housing market for sale, some analysts say.

Most analysts also say the current pace of rent growth is not sustainable. Tenants' finances have been pushed to the limit in more cities, according to a new report from Moody's Analytics. Since the end of 2019, the percentage of U.S. metropolitan areas where a typical worker would have to spend more than 30% of their income on renting apartments has risen to 23% from 8%, Moody's found.

If rents are raised too high, it could lead people to choose to double the number of apartments and homes, leading to higher vacancy rates and potentially lower rent growth, said John Pawlowski, an analyst at real estate research firm Green Street. Others point out that if the economy falls into recession, it is also likely to put pressure on rents.

But so far, that's not happening. Trends such as remote work continue to drive demand for the extra space provided by single-family homes. "The cost of housing may well go down, but I just don't see rents go down that much," Mr Pawlowski said.