A perfect storm of longer lifespans, steady immigration, and the coming of age of the largest generation in the nation’s history is driving up the costs of both rents and homes for sale. America is in the throes of a housing shortage so severe that the average family’s cost of shelter is soaring three times faster than the cost of living.
As demand surges for housing, supplies are not keeping pace. Inventories of existing homes for sale are shrinking, not growing. New home sales will not reach normal levels until 2020. Demand for rentals are so great that rents are still rising despite a surge in apartment construction.
A wave of residential investment
This economic challenge of record rent rates and rising home prices is creating a second wave of residential real estate investment in single-family homes. The first wave converted more than three million foreclosures into single-family rentals, generating returns on investment approaching 10 percent.
“With housing prices rising but wages stagnant, 2016 is likely to be a year of worsening affordability for homebuyers, especially low- and middle-income earners. That is bad news for first-time homebuyers,” said Ingo Winzer, president of Local Market Monitor, which forecasts investment potential and long-term risk in more than 300 housing markets.
“However, for investors looking to put their money into rental properties, these economic conditions point to continued strength in that market.”
The investor share of single-family home sales grew from 14 to 18 percent of existing home sales over the 12 months, according to the April 2016 Realtors Confidence Index. Through the first quarter of 2016, rents are rising faster than median home prices in 45 percent of the markets analyzed, indicating continued strong investor demand for rentals in those markets — while annual wage growth is outpacing rent growth in 43 percent of the markets, indicating room for annual returns on investment approaching ten percent.
“Investment purchases reversed course in 2015 after declining for four straight years,” said Lawrence Yun, chief economist of the National Association of Realtors. “Steadily increasing home prices and strong rental demand appear to be giving more individual investors assurance that purchasing real estate will diversify their portfolios and generate additional income if they decide to rent out the home.”
Last year, investor home sales jumped 7.0 percent to an estimated 1.09 million from 1.02 million, and their market share of sales rose from 14 to 17 percent.
Want profit? Find the opportunities
While demand is creating the new boom in single-family rentals, the greatest profits still accrue to investors with the lowest acquisition costs. As home buyers watch inventories of affordable listings dwindle, investors are finding opportunities to generate simultaneous cash flow and long-term gains from America’s aging and deteriorating housing stock.
- The median age of owner-occupied homes in the U.S. is now 37 years, up from 27 years in 1993. Approximately two-thirds were built before 1980, and 40 percent pre-date 1970. Only 17 percent of today’s owner-occupied homes were constructed after 2000.
- Older homes require more maintenance, upkeep, and repair. From 2007 to 2013, America’s housing stock deteriorated, especially homes owned by lower-income owners. Lower-income homeowners who had more affordable homes were much less likely than higher-income households to make improvements; and those that did spend considerably less on those projects. Older homes are also common in the densely populated, walkable neighborhoods that are acting as a catalyst for urban revival, attracting young newcomers and recent retirees alike.
- More than 1.3 million (1.6 percent of owner-occupied homes) were vacant at the beginning of February, down 9.3 percent from the third quarter of 2015 as they begin to re-enter housing markets as investor-owned rentals or homes for sale.
- A national network of services providing acquisition, rehabilitation, financing and property management is making investing in single family rentals easier than ever for the small players who dominate the sector. Less than 15 percent of rental homes are owned by investors with more than ten properties.
Investor demand for homes they can acquire at a discount is reaching new heights. For example, this year HomeVestors franchises will buy and sell to first-time home buyers or investors about 8,000 houses.
Though market conditions are dramatically different than they were seven years ago, an army of small investors like the one that converted millions of foreclosures into badly needed rental housing is finding new value in giving aging homes a major overhaul.
David Hicks is co-president of Dallas-based HomeVestors of America, Inc. Follow HomeVestors on Twitter or Facebook.