Boom in single-family rentals contributing to inventory crunch

by Megan Donofrio

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Due to a boom in single-family rentals, 270,000 fewer homes have sold each year since 2006. According to a new Zillow analysis, between 2006 and early 2017, the number of single-family homes that are rented increased by 5 million, which is a major contributor to the current crunch in affordable housing inventory.

Tending to be of the-less expensive end of the housing market spectrum, these rented homes present limited the housing options to lower- and middle-income buyers. Roughly 1200,000 of the 270,000 sales lost were among the most affordable homes, which are frequently sought by first-time buyers. Starter homes are more likely than homes of greater value to be rented out across the United States.

Driving this surge in single-family rentals are several related trends, resulting from the housing bust. As homeowners lost homes to foreclosure and home values fell across the country, the U.S. renter population increased rapidly. Following the housing crisis, the total number of single-family homes rented rose from 13 percent in 2007 to its peak of 19.2 percent in 2016, Zillow found.

A growing demand for rentals and falling home values lead to opportunities for investors seeking discounted properties to buy and make available for rent. This investor activity met demands in communities hit hardest by the housing bust and helped curb plummeting home values and restore the market.

The demand for single-family rentals remains strong, as 45 percent of renters are interested in finding a single-family house to rent, yet only 28 percent are able to do so. As home values continue to improve, investors today are holding homes as rental properties and gaining winning returns. In recent years, the rental houses bought tend to be affordable starter homes, more so than those purchased before 2006.

Rentals are cooling down

After a decade of steady growth, the number of single-family homes being rented has stabilized. In early 2017, the percentage of rented single-family homes dipped slightly from the 19.2 percent high of 2016 to 18.9 percent.

“For the past 10 years, the number of single-family homes that are rented has grown steadily and remains near the highest levels ever recorded,” said Aaron Terrazas, Zillow senior economist.  “The combination of foreclosures and growing rental demand following the housing crash was an attractive opportunity for investors – large and small – who were able to buy foreclosed homes and use them to meet the rental demand. At the same time, many long-time owners have opted to hold onto their homes as rentals even after they decide to move somewhere else. With such a large portion of single-family homes being rented out, and with new homes being built more slowly than the market needs, home values will continue to rise, particularly among the most affordable homes with the highest demand.”

The largest group of buyers in the housing market is millennials, who are driving competition for cheaper, entry-level homes. But more and more in the past five years, the homes being purchased and turned into rentals are the same affordable starter homes that first-time buyers seek. As a result, options for buyers are limited and the competition is heightened. The average single-family rental is valued at $215,300, which is a little more than the median-valued home nationwide.

Of the rented single-family homes bought nationwide since 2012, nearly 40 percent are among the most affordable, compared to 34 percent of single-family rental homes purchased before the housing market crash. In the last decade, rental activity has seen an increase in the bottom-third of the market. Across the country, 37 percent of rented single-family homes are among the least valuable in their housing markets.

In Houston, 16.1 percent of single-family homes were rented in 2016. Of that share, 36.4 percent were homes in the least valuable third of the market.

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