By Allison McNeely
For Atlanta real estate agent Jamie Douglas, a dearth of inventory has made it almost impossible to take on new clients hunting for affordable rental homes.
Now, she works with people who have at least $5,000 a month to spend on rent, double her usual base of around $2,500 because there’s just nothing available at lower price points. One house will get 15 to 20 applications and be rented within a day, she said.
“I literally have people begging me to get them a rental,” Douglas said in an interview. “It’s just so crazy down here.”
It’s the latest turn in the unrelentingly hot U.S. housing market, where remote workers and young families fleeing coastal cities for the Sun Belt during the pandemic spurred double-digit increases in housing costs and squeezed supply. And at a time when stocks are slumping, cryptocurrencies are crashing and interest rates are set to rise, real estate seems to be the only area of the market impervious to a slow down.
Rental prices for single-family homes grew an average of 7.8% in 2021, an all-time high, according to the most recent data available from CoreLogic Inc. In December, U.S. home rents jumped 12% year over year for the month, with Miami leading the way with a 35.7% increase.
Home values have been increasing in lockstep, with the median home price jumping 14% year over year in January to $354,750, according to Redfin Corp. Active listings fell 29% to an all-time low of 438,000 due to tight supply. Mortgage payments have continued to climb, reaching an all-time high of $1,877 due to higher borrowing costs and asking prices, the firm said.
Shift To Rentals
The appeal of rentals has grown in recent years as people have been priced out of the housing market or are unwilling to take on the financial burden of a mortgage. Institutional investors have added further pressure to home prices by snapping up existing single-family homes to rent out — so much so that they’re starting to build new ones. Landlords, builders and institutional backers have committed $85 billion to that effort, according to Alan Ratner, an analyst at housing research firm Zelman & Associates.
Invitation Homes Inc., the largest single-family landlord in the country, said in a statement that it intends to keep building homes to meet surging demand. Right now, its holdings represent less than 1% of the rental market.
Housing economist Jay Parsons said pressure on the rental market is unlikely to let up any time soon because of an overall shift in the desirability of renting.
“By far, the fastest growing demographics for housing is coming from upper-income groups,” he said. There has been a significant increase in household formation since summer 2020 as high-income Americans have continued to see their wealth increase, said Parsons, head of economics and industry principals for RealPage Inc., a real estate technology firm.
Rents in coastal cities hard-hit by the pandemic, like New York City, have started to recover while rents have remained high in Sun Belt cities, suggesting that pandemic migration trends aren’t reversing, Parsons said.
“There’s a contingent of upper-income households that don’t want to be pinned down,” he said.
Cash Cow
Real estate investor Eric Martel made a big business and lifestyle change in 2018, when he sold his house in the San Francisco area and moved into a luxury apartment rental in downtown Los Angeles.
He used proceeds from the sale to help fund his single-family rental homes venture, MartelTurnkey, which buys, renovates and sells single-family homes to investors. The company, which Martel runs with his wife and two adult sons, started out in 2016 by acquiring single-family rental homes and leasing them directly. Now, the firm has pivoted to selling homes as investment properties, and helps new landlords get financing and find a tenant, Martel said. It also connects investors to property-management services for the homes that they buy.
“It’s more profitable right now for us to be flipping the houses, selling these rental properties to investors, than for us to keep the single-family rentals ourselves,” he said. The company currently has about 140 deals in progress and expects to sell 180 properties this year, compared to 120 last year, Martel said.
It may get marginally more expensive for individual buyers to acquire houses, as the Federal Reserve is expected to start raising interest rates to cool off the economy, which would translate into higher mortgage rates. Meanwhile, institutional investors looking to expand their stable of rental housing can pay cash.
Still, RealPage’s Parsons isn’t sure that they’re going to change the face of the market any time soon. For one, it’s much easier to buy and build 300 apartment units than 300 single-family houses, he said.
The institutional segment of the rental housing market is still small; 77% of rental homes are owned by individuals while institutional investors have 1.8% of the market, according to the National Rental Home Council.
“You can’t achieve scale as quickly,” he said. “I don’t think you’re ever going to see institutions represent a majority of the market.”
Meanwhile, renters will have to continue lining up to find their next home.
MartelTurnkey owns an apartment building in the fashionable Overton Square area in Memphis, as well as single-family homes in the city. A home they listed for rent had 50 viewings, whereas the apartment building got two to three viewings for a unit, Martel said.
In Atlanta, Douglas expects that the buying market frenzy will slow down slightly as interest rates and borrowing costs rise, but isn’t expecting the same cooling off for rentals. She heard of a house listed for $5,000 a month that ended up leasing for $6,000 due to overwhelming demand. Owners who sold their homes before finding a new one to purchase are also putting pressure on the rental market, she said.
“I actually think it’s harder to find a house to rent right now than to buy,” she said.
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