Are investor-owned Single Family Rentals (SFRs) crowding out homebuying opportunities, especially for first-time homebuyers? Are SFRs contributing to rising rents? What happens to home values if there is a sudden exit from this market? What happens if there isn’t an exit from this market at all? These are questions that housers across the country are asking. The answers are still developing, but there is no question that SFRs have a growing impact on several large markets, especially in Atlanta, Georgia, Phoenix, Arizona, and cities throughout Florida. It’s also a growing trend elsewhere.
Last week the Senate Banking, Housing and Urban Affairs Committee held its second hearing on the impact of single-family residential rentals on home prices, neighborhood impacts and homeownership. The share of SFRs has grown exponentially over the past decade due to aggressive purchasing by a range of investors. These include individual small investors (aka. “Mom and Pops”) who own fewer than ten properties, Real Estate Investment Trusts (REITs) of all sizes, and institutional investors with inventories in the thousands. Several at the hearing expressed serious concerns about this market, the practices of some companies holding large inventories of SFRs, and their impact on homeownership. While it’s easy to reach broad conclusions with compelling anecdotes, we must understand this market in much better detail.
Single-family rental has always been a substantial part of the rental market.[i] Small-sized investors remain the largest component of this market. The SFR business has always been challenging, requiring hands-on property management on properties that are widely scattered across a city or cities. Many of the smallest property owners were as financially stretched as their tenants, while others maintained business models that depended on minimal maintenance and rapid evictions.
The struggle between homebuyers and landlords is hardly new, memorably highlighted in Frank Capra’s 1946 film It’s a Wonderful Life. Charles Lane (described on his IMDb page as “the scrawny, scowling, beady-eyed, beak-nosed killjoy”) tells Mr. Potter, “It’s no skin off my nose, I’m just your little rent collector, but you can’t laugh off this Bailey Park anymore… Dozens of the prettiest little homes you ever saw. Ninety percent owned by suckers who used to pay rent to you… [And] every one of these homes is [now] worth twice what it cost the Building and Loan to build.”[ii]
Today, interest in the SFR market is growing. In many cities, the share of large investors has been growing in leaps and bounds. Large investors, defined by CoreLogic as those with more than 100 properties, have grown nationwide from 17.3% in September 2019 to 25.7% in September 2021. This is a 12% yearly percentage increase and an 8% increase from September 2019. However, some large investors, like Invitation Homes, chose not to grow their portfolio in 2020 due to pandemic-related economic uncertainty.[iii] New data from publicly traded institutional investors for 2021 is expected next month.
As a result of the housing market collapse and the Great Recession, millions of Americans lost their homes as home values plummeted. Millions more found themselves “underwater” in their mortgages, where they owed more than their home was worth, often much more. Several of us at the Treasury Department recognized that these vacant homes were driving down neighboring property values. Investor purchases of vacant foreclosed properties were an important component of stabilizing local housing markets.
Treasury and the Federal Housing Administration (FHA) encouraged investors to buy vacant foreclosed homes, known as Real Estate Owned (REO). Purchases by investors included “short sales” prior to foreclosure, bulk purchases of REO, note sales and foreclosure auctions. Researchers at the Federal Reserve Bank of Philadelphia found that between 2007 and 2014, single-family home purchases by institutional buyers accounted for “a net increase of 9 percent in real house price growth and 28 percent of the reduction in homeownership rates. Additionally, we found that institutional buyers on net also led to improvement in the local labor market by reducing the local unemployment rate and by raising local total employment, construction employment in particular.”[iv]
The strategy was working as we had hoped. But as I often say, the law of unintended consequences is never repealed. We believed that investors would sell into a rising housing price market as their exit strategy, creating opportunities for first-time homebuyers as the economy recovered. We had not foreseen that rents would also rise, and the economies of scale brought by large portfolios would require holding inventory. Further, earnings growth requirements and rising rents incentivized buying more properties. During the latter half of the decade, consolidation and expansion through acquisition of competitors provided that growth.[v] But for many investors, growth has come at the expense of first-time homebuyers and contributed to escalating home prices.
Geographic concentration within individual markets is critical to leveraging scale, while geographic diversity nationally is important for managing regional economic risks. Institutional investors are a growing part of the SFR market. Institutional SFRs are most dominant in neighborhoods with Area Median Incomes (AMIs) between 80% and 120% – the heart of the first-time homebuyer market.[vi] And according to recent research published in Urban Affairs Review, they are disproportionately located in White neighborhoods.[vii] Invitation Homes emphasizes to investors that they “target attractive neighborhoods” with “desirable schools.”[viii]
Where rents are rising, large investors are a part of the problem. According to CoreLogic, in markets targeted by large investors, rent growth for detached properties has been double that of attached properties, led by Miami and Phoenix.[ix] What we don’t know is how big a part of the problem they are, and whether their role is causal or just correlative, as large investors are seeking markets where rents are likely to rise. Regardless, the cost of rising rents, is paid not just by tenants, but by the communities as a whole. According to NHC’s Paycheck to Paycheck database, which compares housing costs for 147 occupations in 390 metropolitan areas, schoolteachers in Miami and Phoenix cannot afford to rent a 2-bedroom apartment, and childcare workers cannot afford to rent a studio. Neither they nor accountants and Registered Nurses can afford to purchase a home there as well.[x]
We have a lot more to learn about this growing market. How will rising interest rates impact this business model? How can we make first-time homebuyers more competitive in markets where they are competing against cash offers? Is there a role for the federal government? HUD’s Neighborhood Stabilization Program attempted to enable nonprofits to buy vacant homes during the Great Recession but, it could be cumbersome and costly to use. That might work in a market with an overabundance of inventory, but not in markets where inventory is scarce, and cash buyers dominate. Several states have statewide CDFI funds that allow participating CDFIs to bring quickly deployable acquisition capital to the market. Is there a role for CDFIs in the cash buyer market? What has been the role of the Federal Housing Administration and government-sponsored enterprises Fannie Mae and Freddie Mac in this market? We have a lot more to learn.
NHC will continue to work with our broad range of members on this issue. If you have information to add to our research, please let us know with an email to me at email@example.com or our Policy and Research Director, Luke Villalobos at firstname.lastname@example.org.
[i] Reid, Caroline, Rocio Sanchez-Moyano and Carol Galante (2018). The Rise of Single-Family Rentals After the Foreclosure Crisis: Understanding Tenants Perspectives, Terner Center, UC Berkeley. https://ternercenter.berkeley.edu/wp-content/uploads/pdfs/Single-Family_Renters_Brief.pdf
[ii] Capra, Frank, It’s a Wonderful Life, 1946. https://youtu.be/hGYTqwzJt6w?t=66
[iii] Invitation Homes 10-K for FY 2020. https://sec.report/Document/0001687229-21-000005/#i0743fba381dd4445a426cce0393d4dfe_3421
[iv] Lambie-Hanson, Lauren, Wenli Li, Michael Slonkosky, Leaving Households Behind: Institutional Investors and the U.S. Housing Recover, Federal Reserve Bank of Philadelphia Working Paper WP-19-01, January 2019. https://www.philadelphiafed.org/-/media/frbp/assets/working-papers/2019/wp19-01.pdf
[v] Colburn, Greg, Rebecca Walter and Deirdre Pfeiffer (2021). Capitalizing on Collapse: An Analysis of Institutional Single-Family Rental Investors. Urban Affairs Review Vol. 57(6). https://journals.sagepub.com/doi/abs/10.1177/1078087420922910
[vi] Colburn, Walter and Pfeiffer
[vii] Colburn, Walter and Pfeiffer
[viii] Invitation Homes 10-K for FY 2020. https://sec.report/Document/0001687229-21-000005/#i0743fba381dd4445a426cce0393d4dfe_3421
[ix] Boesel, Molly, U.S. Single-Family Rents Up 10.2% Year Over Year in September, CoreLogic Intelligence, November 16, 2021. https://www.corelogic.com/intelligence/u-s-single-family-rents-up-10-2-year-over-year-in-september/#:~:text=Single%2DFamily%20Rent%20Growth%20by%20Price%20Tier&text=Rent%20prices%20for%20the%20low,of%202.8%25%20in%20September%202020.
[x] National Housing Conference Paycheck to Paycheck Database. https://nhc.org/paycheck-to-paycheck/