Does Single-Family Build-For-Rent's Surge Harm Entry-Level?
We read it in the headlines nearly every day.
Institutional investors are out-bidding would-be homeowners, exacerbating the housing shortage and driving up prices.
It’s a proposition many find attractive. It suggests that somehow the market is not working properly and requires intervention on the part of the government to protect “the little guy,” the homebuyer at the lower-end of the price spectrum.
But is it true? If it is, why is it happening?
First, does the fact that institutions have become more active buyers of single-family property drive up prices? Presumably yes. After all, “markets are made on the margins.” So, if you add demand – more buyers -- you would expect prices to rise.
But think about it. In this case, more [institutional investor] buyers creates more rental stock than would exist if they were not buying. So, really, all that happens is we end up with more rental homes and fewer owner-occupied homes.
More supply for the rental market, which, if you believe the logic that it’s driving up prices on the for-sale side due to less inventory, you must also conclude that it’s driving down rental prices, all else being equal. Is one or the other a more “moral” outcome? I don’t think so.
This is a bit like looking at the proposition are house prices rising because not enough people are putting their homes on the market? If all there was, was a re-sale market, we’d just be talking about musical chairs. I sell my home to you and buy someone else’s home. But where do they go? What ultimately matters is whether the total housing supply is increasing with demand. As long as housing supply (meaning total units, not resale inventory) grows slower than demand, the only way to create equilibrium is for rents/house prices to rise.
Let’s return to institutional buyers of rental housing and ask a question. Why is there so much interest in this now? In part, we can blame low yields everywhere for everything driving “the reach for yield.”
But the real driver, is the one housing activists and all those who care about housing in this country should be focused on. And that is our unwillingness to entitle and approve enough housing.
The yields in the single-family for-rent business are actually not very impressive at the moment. It’s actually pretty hard to find locations that will generate a 5% yield after expenses when factoring in reserves over time. If you doubt the numbers, look at the financials of the publicly traded single-family for-rent companies, or talk with those building these projects. Don’t confuse profits on sale with yield. If you build it for a 5-6% return on cost and sell if for 4.75% cap rate, you can make good money. But the current actual yield is not impressive.
If the current return of around 5% was the anticipated long-term return, the interest would be limited. Investors are betting on significant rent appreciation over time because they fundamentally believe that our society will not get its act together in the housing space and address our problems.
Sadly, I believe they are right. The “cure”, if you see institutional demand for housing as a problem (not that I do), is to demand that your municipality approve a lot more housing.