The new-home market currently faces stiff challenges, which have rapidly evolved into what can be termed as the 'Summer of Cold Feet'. Homebuilders are now grappling with two major issues: generating new absorptions and preventing order cancellations from mounting.

Mostly because – as Animal Spirits tend to move markets – waiting to move ahead with the most significant purchase most households will ever make just feels like the thing to do. After all, what if rates start heading down? Even more unnerving, what if house prices start falling as months' supply of inventory begins to swell back to a pre-pandemic normal? These are valid concerns that are currently shaping the market.

Through this time last year and beyond, new home sellers – bringing offerings to a residential for-sale market largely silenced as owners watched their home valuations rise and safeguarded their hold on historically low interest rates on their own mortgage loans – had it surprisingly good. Due to the lock-in effect of those low, low interest rates, homebuilders operated in a near "only-game-in-town" arena.

Now, however, as more consumer households hesitate to purchase until signs of clarity emerge on the pricing, interest rate, economic and political backdrop, etc., the industry could witness a significant shift from owning to renting, a dynamic change that is worth watching.

Could single-family build-to-rent go on an "only-game-in-town" run of its own, now that so many would-be homebuyers have repaired to the sidelines?

Invitation Homes execs, who reported Q2 2024 earnings yesterday and today discussed financial and operational performance with investment community representatives, have a take on this:

Invitation Homes acknowledged the ongoing pressures of affordability on consumers. CEO Dallas Tanner comments:

Affordability remains a critical issue. We're seeing more households choosing to rent as a strategic decision amid high home prices and mortgage rates."

The U.S. housing market is experiencing significant turbulence in 2024, with consumers bearing the brunt of these challenges. Record-high home prices and rents, coupled with elevated borrowing costs, are squeezing household budgets, leaving fewer homeownership options, and threatening those who do move ahead with closings on a new home with a gnawing risk of having paid too much on the eve of a major price drop.

Affordability backdrop: Core Logic

1. High Mortgage Interest Rates: Spring home sales declined due to high mortgage interest rates, which have driven down demand among all buyer types, including investors and those looking at newly built homes. This has resulted in cooling home prices in more markets.
2. Delinquencies and Foreclosures: The number of mortgages with delinquencies of six months or more has fallen to levels not seen since before the Great Financial Crisis. The share of mortgages in foreclosure is also at a low of 0.2%, indicating many borrowers have managed to avoid foreclosure despite financial strains.
3. Adjustable-Rate Mortgages (ARMs): The share of ARMs rose to 15.5% of the dollar volume of conventional single-family mortgage originations in May 2024, the highest this year. This increase is a response to surging homeownership costs, as buyers seek more affordable payment options.
4. Appraisal Gaps: Among all home sales in the closing process, 8.6% were appraised below the contract sales price in June, down from 10.7% a year ago. Appraisal gaps are more prevalent among small starter homes, reflecting higher overpayment risks for first-time buyers.
5. Decline in Home Sales: Sales of newly built homes are down 17% year-over-year through the first six months of 2024. Existing home sales also declined by 19% in June compared to last year, marking an early seasonal slowdown driven by high mortgage rates.
6. Investor Activity: Investors made 23% of all single-family home purchases in June 2024, down 5 percentage points from January 2024, yet still above pre-pandemic levels.
7. Home Price Appreciation: Spring home price appreciation continued to slow, with a 0.6% increase in May from April. Annual U.S. home price appreciation was 4.9% in May, with some metros experiencing year-over-year declines.
8. Rent Growth: CoreLogic’s Single-Family Rent Index (SFRI) reported a national year-over-year rent growth of 3% in April 2024, consistent with trends over the past year. However, monthly rent growth showed momentum above the long-term trend for April.

Single-Family Rental (SFR) Market Insights

Key Takeaways from John Burns Research & Consulting (JBREC):

1. Healthy Demand: The SFR industry experienced continued strong demand in the first half of 2024.
2. Rent Growth: National SFR new lease asking rent growth rose by +3.9% year-over-year (YOY) in May 2024, outpacing the historical average of +3.6% YOY. This growth highlights the sustained demand for rental properties amid homeownership affordability challenges.
3. Economic Support: The overall economy remains robust, supported by job growth, immigration, and rising incomes (though income growth has slowed compared to recent years).

Burns Single-Family Rent Index™ (BSFRI):

• As of May 2024, national SFR new lease asking rent growth surpassed historical averages, indicating strong rental demand despite broader economic uncertainties.

SFR REIT Performance:

• Earnings calls from major SFR REITs like AMH and Invitation Homes (INVH) reflect similar trends, with May 2024 same-home new lease rent growth reported at +5.4% and +3.5%, respectively.

Demand Dynamics:

• Affordability issues are pushing many would-be homeowners into the rental market, supporting demand for SFR properties.
• The SFR sector is seen as a viable "weigh station" for households waiting for better buying conditions, providing flexibility without the long-term commitment of homeownership.

Challenges and Strategies:

• Price Barriers: Developers and builders need to find ways to reduce costs and make housing more affordable.
• Economic Mobility: Enhancing economic and educational opportunities can help increase household incomes and payment power.
• Regulatory Environment: Streamlining regulatory processes and reducing associated costs can help facilitate more efficient and cost-effective housing development.

The Outlook

• JBREC's research suggests that the SFR market will continue to grow, driven by sustained demand and the strategic positioning of rental properties as an attractive alternative to homeownership.
• The BSFRI indicates that rent growth is likely to remain positive, providing a stable outlook for investors and developers in the SFR sector.

The Single-Family Build-to-Rent market is positioned to play a significant role in addressing the current housing affordability crisis. Stakeholders can help bridge the gap between household incomes and housing costs by reducing costs, increasing economic mobility, and streamlining regulations.

Navigating the complex regulatory environment remains a significant focus for us," Invitation Homes CFO Jon Olsen told investment community researchers and analysts during today's earnings call. "We are actively engaging with policymakers to advocate for more streamlined processes."