Single-Family Homes – Build to Rent
The distinction between rented and owner-occupied residences has typically been that apartments are rented and single-family houses are owner-occupied. Despite this generalization, individuals and small private investors have rented single-family homes forever. Until recently, this has occurred at a small scale with individuals and private investment groups acting as the landlord.
Single-family rental is no longer a mom and pop industry. Following the housing bust that led to the financial crisis, institutional investors found an opportunity to acquire a large volume of homes through bulk sales from distressed builders or bank foreclosures. Just as the S&L crisis sparked the development of the modern REIT era (a story for another day), the sub-prime credit crisis initiated the rise of the currently developing institutional single-family rental (SFR) sector.
Traditional fundamental analysis encourages us to look at the supply and demand relationship between the demand to own or rent a home and the supply of various home types. The homeownership trend in Figure 1 helps us understand the underlying currents in the housing choice decision. Starting in the mid-1990s, some new policies encouraged the marginal renter to become the marginal owner leading to a steady rise in homeownership. This came at the cost of reducing (or slowing the growth of) the renter population. As we can painfully recall, the end came with the housing market peaking in 2006 followed by declining housing values and ultimately the subprime crisis.
Figure 1 — Source: United States Census Bureau
Following the 2009 recession, the homeownership rate gradually moved back to a more sustainable level. As the ownership rate fell, from 69% to 63%, demand for rental housing was on the rise. Notice that approximately two-thirds of households own their residence leaving one-third as renters. When owned homes decline by one-percent, the number of renters increases by two-percent. The combination of excess single-family homes from the 2006 market shift with rapidly increasing rental demand encouraged some large investors to acquire portfolios of foreclosed houses to be rented initially and sold at stabilized prices once the market recovered.
The new owners of single-family home portfolios, hedge funds, opportunistic investors, and institutional asset managers realized that the growth in renter demand repeatedly outpaced the development of new multifamily units. Figure 2 shows both the total number of renters in the US and the incremental number of new renters entering the market each year. 2011 – 2015 was a utopian period for residential rentals. Anyone renting homes of any type was bound to succeed. Unexpected rental growth gave the new SFR owners time to realize that they can effectively and efficiently manage a collection of separate housing units.
Figure 2A — Source: United States Census Bureau – American Housing Survey
Blackstone became a key participant in the SFR market when they formed Invitation Homes in 2012 with the goal of purchasing foreclosed homes. They may not have been the first to make this move but they are an industry leader who brought tremendous attention to the emergence of SFR. At one point it was reported that Blackstone was buying over $100 million of homes each week.
Institutional investor entry into the SFR market started with the acquisition of distressed existing homes that were converted from owner-occupied to rental. Following the stress of the housing decline that started in 2007 and the 2009 recession, investors were cautiously interested in this sector but viewed investment as risky. However, the expansion of rental demand from 2011 to 2015, shown in Figure 2, quickly encouraged investors to be more aggressive in this area. The rising demand for SFR quickly consumed the pool of distressed homes forcing expanding players and new players to consider building new homes for rental rather than sale.
Using data from the National Association of Home Builders, a Wall St. Journal article dating back to 2013 states that over the 30 years leading up to the 2006 housing peak only about two percent of single-family homes were built with the initial intention of being rented. During 2013 this number jumped to 5.8%. Now home builders are combining multifamily amenities and services with single-family independence to optimize subdivisions for rental. This relatively new phenomenon of building new homes expressly for rental offers a new perspective to the long-term view, and public policy, supporting owner-occupancy for single-family homes.
After a lifetime of hearing the advantages of ownership and observing a public policy which encourages homeownership, current homeowners might be concerned that newly developed single-family rental communities in their neighborhood will detract from their value. The Bergstrom Center evaluated this very concern by measuring the impact of SFR on neighborhood property values in two locations and the results might be surprising. We used two methods, hedonic and repeat sales, to isolate the impact of neighboring rental housing on property values across two markets, Duval and Miami-Dade counties, and the results are consistently different. In short, the impact of greater than average rental housing in your neighborhood depends on your location.
Specifically, we looked at arm’s length sales prices of single-family homes between 2001 and 2019. First, we determined primary residency status of the seller by a homestead exemption and analyzed whether these properties sold at a premium. Next, we computed the local share of primary residences and analyzed how this proportion affected neighborhood prices. In other words, regardless of individual ownership status, do homes located in relatively high primary-owner neighborhoods sell at higher prices? The results of our analysis differ between Jacksonville and Miami.
|Value of Homestead Exemption||Value of High-Owner Neighborhood|
|Jacksonville (Duval County)||5.2%||3.2%|
|Miami (Miami/Dade County)||1.5%||-2.6%|
Table 1 — Source: UF Bergstrom Real Estate Center
After accounting for a list of property characteristics such as location, size, age, etc., selling a home that currently has a homestead exemption adds 5.2% to the property value in Jacksonville but only 1.5% to value in Miami as seen in Table 1. More interestingly, a 10 percentage points increase in neighborhood owner-occupancy rate (measured by homestead) is associated with a 3.2% price increase in Duval County but a 2.6% price decrease in Miami-Dade.
To further analyze the dynamics of the neighborhood effect, we separately computed a repeat-sales price index for homes located in high vs. low owner-occupancy neighborhoods. This index tracks the change in value of the same property if it sold more than once during the observed period. The results of this analysis are displayed in Figure 3. Both charts indicate that property values in relatively high rental/secondary neighborhoods are more volatile than in neighborhoods with higher owner-occupancy. However, the pattern for relative growth in value between categories again differs in Jacksonville and Miami, which is consistent with our previous hedonic analysis.
In Jacksonville, high owner-occupied neighborhoods had relatively greater appreciation. Miami, on the other hand, observed more appreciation in neighborhoods that started off with lower levels of owner-occupancy. While these results may contradict each other, they could also suggest a specific underlying difference in the market between these two metropolitan areas. The bottom line is that new development of single-family rental communities should not be dismissed as something that will negatively impact home values. Rather, as is often the case, the answer to our question is: “it depends.”
Figure 3 — Source: UF Bergstrom Real Estate Center and The Florida Department of Revenue
Florida Consumer Sentiment
During a time of relative prosperity, improving labor markets, rising stock prices and asset values, Florida Consumer Sentiment fell throughout the second half of 2021. The overall sentiment measure, as developed by the UF Bureau of Economic and Business Research (UF-BEBR), has ranged from a low of 59, during the 2008 great recession, to a high of 111, during the tech expansion of 2000. 624 respondents to the BEBR survey during November and December 2021 produced an average result of 72.2.
This score follows roughly three years where the index hovered around 100 until the pandemic of 1Q 2020 dropped the index by approximately 20 points. The index then moved through scores in the 80s until 3Q 2021 when it dropped again into the 70s and briefly below at 69.6. Figure 1 shows the two downward steps in Consumer Sentiment caused by the pandemic alongside the rising stock market performance. It seems that Floridian perception of financial conditions and expectations differs from the market’s expectations.
Figure 1 — Source: UF Bureau of Economic & Business Research and Standard & Poors
The overall index of 72.2 has five components. Two of the components focus on current conditions (Figure 2) and three focus on expectations of future conditions (Figure 3). All five factors followed the general pattern of falling from July to October or November and rebounding a bit in December. The rebound is welcomed but did not recover the autumn loss in financial perception.
Figure 2 — Source: UF Bureau of Economic & Business Research
Figure 3 — Source: UF Bureau of Economic & Business Research
Current conditions never seem to reach yesterday’s expectations. Notice in Figure 3 that the Futfin (future expectation of personal financial position) value at the beginning of the Future Scores chart at 95. Compare this number to the Curfin value in Figure 2 (current view of personal financial position) at the end of the Current Scores chart at 72. Respondents expected their personal financial positions to rise to 95 by year-end, but their sentiment ultimately fell during the year to 72.
The individual components also reveal that sentiment is higher for individuals’ personal expectations than it is for the overall US future conditions. In Figure 3, the Future Scores chart shows a comparison of future expectations for personal conditions, Futfin, to one- and five-year expectations for national conditions, USfufi and USnex5. As the general trend of expectations rises and falls, personal conditions are consistently perceived more favorably than that of the US and by a wide margin. Perhaps Floridians believe that the state will provide more opportunity for financial performance than will the nation on average.
Just the Facts
Highest rate of inflation since 1990 in Q1 2022