This spring, the median price of a single-family home in the U.S. hit a record high at $335,000. The average time that a house sat on the market? Just 18 days. That’s also a record according to the National Association of Realtors.
Millions of Americans are contending with the double-edged sword of a booming housing market. While the sellers’ market makes those who already own homes even wealthier, high prices push homeownership further out of reach for many Americans. In turn, the housing boom is creating a new population of home renters: people who in years past would have been able to afford a home but are now getting priced out.
While some people prefer renting a home to buying one, the home rental trend can’t be divorced from the high price of homes, which is forcing many people to rent what they can’t buy. Home prices are astronomically high, but houses are nonetheless being plucked off the market faster than ever.
Most recently, the pandemic and the premium that it put on private indoor and outdoor space has driven demand and prices. But like many things, this was an existing trend that the pandemic merely accelerated. It has its roots in a confluence of factors, from an aging millennial population to an influx of private equity.
What’s Driving Up Home Prices?
Some 5.6 million single-family homes sold last year — more than at any time since the housing bubble — and the prices of those homes were up 9 percent from a year before, according to the National Association of Realtors. The organization expects average housing prices to go up another 9 percent this year.
Though not the root cause, the pandemic did accelerate those costs, as schooling and working from home made having a nice, large living space all the more important.
The pandemic also allowed subsets of Americans who remained employed — usually those who were more gainfully employed in the first place — to save money for a down payment, as there was less for them to spend their money on.
Coupled with historically low mortgage interest rates, this past year has encouraged many Americans to try their luck buying a house.
The reasons are demographic as well. Millennials, who make up the largest living cohort, have arrived at the age where they’re forming new households and buying their first and even second homes (though that milestone happened later than in previous generations). And as millennials with growing families flock to the housing market, the supply of homes has not been enough to keep up.
Additionally, many people, including older Americans who don’t move as much as young ones or who were afraid to let people visit their homes in the pandemic, are holding onto their homes longer, meaning many existing homes — which make up the vast majority of home sales — have not been entering the market.
Finally, investor interest in renting out single-family homes as an asset class has led them to buy up much of the housing stock that individuals once would have. Buying homes to rent means there are fewer to buy to live in, which, by extension, has led more potential buyers to rent.
Investors are competing with individuals to buy houses. And it can be more attractive (and quicker and safer from a financial standpoint) to sell a whole development to investors in a single-family rental company than to a series of individuals.
The Rise of Single-Family Rentals
During the Great Recession, when the housing bubble popped and when millions of Americans foreclosed on their homes, investors swooped in to buy those homes at a discount. The low prices made it feasible for big business to enter a market controlled by mom-and-pops, usually individuals who owned and maintained a single or a few rental properties as an extra income source. New technologies also made it easier to price and buy properties around the country, rather than relying on local experts, as well as to lease out and even maintain properties.
Individuals still dominate as single-family rental landlords, but companies and corporations are taking a bigger share of the pie. In 2018, the last available year for this data from the US census, companies and partnerships made up about 16 percent of single-family rental ownership while real estate corporations and real estate investment trusts controlled a growing 2.3 percent.
Institutional ownership of these rentals can be a good or bad thing for renters, depending on how you look at it. Corporate ownership means you can probably contact someone about repairs day or night and don’t have to worry about your landlord being on vacation. But it also means that rents are bound to go up with the market (whereas a mom-and-pops might leave rents alone for good tenants).
Regardless, single-family rentals are becoming an increasingly important way to house the aging millennial population.
Stock in single-family rental companies like Invitation Homes and American Homes 4 Rent are at all-time highs. Occupancy rates for single-family rentals are at a generational high of more than 95 percent.
Monthly housing costs are much lower for single-family rentals compared with single-family home purchases, according to Harvard’s Joint Center for Housing Studies, and the typical income of families living in those rentals is more modest as well. And while rental prices are growing, they’re going up nowhere near as fast as home-buying prices. Home prices in February were up 17 percent compared to a year earlier, while single-family rent was up less than 4 percent, according to data from CoreLogic.
Of course, with the higher housing costs of purchased homes also come the equity of those homes that people can sell later — an important way to build wealth. The rise of single-family rentals is one of many trends portending the erosion of personal ownership. Thanks in part to digitization, people are renting rather than owning everything from music to farm equipment, ultimately giving them less control over what happens with that stuff.
What This Means for the Future of Housing
The breakneck pace of home price growth is going to continue until there’s enough supply to meet demand, which Lawrence Yun, National Association of Realtors’ chief economist, doesn’t expect to happen until sometime next year.
“Next year at least the multiple offers will go away,” Yun said, referring to the situation of receiving numerous offers above the asking price. “But I think the prices will be higher next year, so it’s a trade-off.”
The thing is, with the notable exception of the Great Recession which was caused by a housing bubble, housing prices generally tend to go up. And this housing boom is much different from the last one in its fundamentals: People are putting more money down and their credit ratings are high, so the likelihood of a crash is low.
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