Why Single-Family Builders Are Dipping Into The Rental Market
One of the defining characteristics of the Great Recession was a long period of declining homeownership. Since its peak at 69.2% during 2004, the homeownership rate declined through 2016, reaching a post-recession low of 62.9%. In recent years, the share of homeowning households gradually increased, albeit with notable declines during the first half of 2019 due to housing affordability and mortgage interest rate challenges.
While the current seasonally adjusted annual rate of homeownership of 64.7% is an improvement over years past, it is below the average rate of 65.6% that had prevailed since 1980. Combined with ongoing challenges with saving for a down payment, there’s a growing number of households for whom apartment living does not suit their family needs but for whom homeownership remains impractical.
As a result, the single-family sector has expanded to meet this rising source of housing demand. The dominant primary source of single-family rental housing has come from older single-family homes that switch from being occupied by homeowners to renters, with a gain of more than 5 million such homes in recent years. Over 90% of these net gains to the rental housing stock are owned by individuals and small investors.
With such a large inflow into the rental sector, it makes sense that home builders would shift some production to this emerging market. And this has happened, although the size of this shift is somewhat limited. Using Census quarterly data, NAHB estimates that from the final quarter of 2018 through the third quarter of 2019, 41,000 single-family homes built-for-rent (SFBFR) began construction. This constitutes a market share of just below 5% of all single-family construction starts. The historic market share for SFBFR homes from 1992 to 2012 is 2.7%, so while the current share is small, it is elevated compared with historic norms.
However, recent growth for this market has been somewhat subdued. For example, from the final quarter of 2017 through the third quarter of 2018 (a year earlier), there were 45,000 SFBFR homes that began construction, a decline of almost 2%. Despite this dip, which occurred during a time when much of the single-family construction industry slowed, the single-family rental market seems set for gains in the years ahead as the demand for single-family structures rises among all tenure types.
How do SFBFR homes differ from their more common built-for-sale counterparts? NAHB used 2017 Census Survey of Construction data (the most recent available with the required data) and found a number of contrasting characteristics. Not surprisingly, SFBFR homes were generally smaller and had fewer rooms. These structures were more likely to be single-story, but were much more likely to be a townhouse (attached housing). SFBFR residences tended to be located on smaller lots and were more likely to have a single-car garage or no on-site parking, relative to newly built for-sale housing. SFBFR homes had a slightly longer construction time but tended to have lower construction costs. Geographically, such homes were concentrated more in the middle of the U.S. rather than the coasts; almost one-quarter of SFBFR homes were built in Texas, Oklahoma, Arkansas, and Louisiana.
These characteristics will likely change as this sector continues to evolve. Additional SFBFR construction in large metro suburbs and exurbs will require different construction and development strategies than projects of the past, but demographic tailwinds will support expansion in the years ahead.