Commentary: Buying a first home is only going to get harder

The rapid growth of the build-to-rent housing industry seems ominous for would-be homebuyers, particularly when the inventory for sale is so low. While the size of the industry is still small relative to the entire U.S. housing market, every little bit counts when rising demand is already pushing prices higher – especially for first-time homebuyers. Now with institutional investors such as KKR & Co. buying up houses to rent, the impact could be felt sooner than appreciated.

For a little perspective, there were 64,000 homes built to rent in the U.S. in 2020, up from 37,000 in 2017. That’s significant growth in a few years, but in a country with over 80 million owner-occupied housing units, we’re still talking about less than 0.1 percent of the existing stock.

That’s not the whole story, though. The build-to-rent industry is a much bigger percentage of the annual production of new homes. After a decade of reduced construction following the 2008 financial crisis, the housing industry is now building single-family homes at a rate of between 1.1 million and 1.2 million units a year. Take out the 350,000 units or so that are torn down and that’s about 800,000 net new single-family homes a year. In that context, 64,000 build-to-rent units is around 8 percent of annual net new supply – and that share could double by 2024, according to Hunter Housing Economics.

It’s an even bigger dynamic in the entry-level market – the price points that big investors are interested in – in fast-growing metro areas that are attracting a lot of people in search of cheaper places to buy homes. In the June new-home sales report, 43 percent of homes that sold were for over $400,000, 28 percent were between $300,000 and $399,999 and only 29 percent sold for under $300,000.

The states with the highest share of single-family rentals are fast-growing Sun Belt states like Georgia, Florida and Arizona. A build-to-rent industry producing 100,000 homes a year could end up being 30 percent of the entry-level construction market in metro areas like Phoenix and Nashville.

There are flywheel effects that could accelerate the growth of new rentals over the next several years. Investors and operators spent the last decade learning how to make money by scaling up portfolios of single-family homes that were rented out. Institutional capital took notice and poured in. Now they’re partnering with major homebuilders and placing orders, such as Invitation Homes and PulteGroup did last month when they announced a deal to build 7,500 rental homes over the next five years. Investors could become more confident in the industry as an asset class, and homebuilders might decide they prefer the predictability of selling to build-to-rent operators rather than deal with the whims of individual homebuyers, shifting the construction market away from entry-level, single-family new homes.

Institutions and large-scale investors have advantages when it comes to homebuying that individuals don’t. They don’t need to wait on a mortgage or the sale of an existing home, and they can just pay cash for properties. They can ride out bumpy periods in the economy when homeowners might be dealing with unemployment or other cash crunches that can make it tough to keep paying the mortgage. And thanks to changes in the Trump administration’s Tax Cuts and Jobs Act, there’s less of a tax advantage when it comes to mortgage interest payments, reducing an edge that individuals might have had over institutions.

This doesn’t mean that homeownership in America will go away, but it might become more competitive and more limited. Higher-end homes will probably remain exclusively for individual ownership. Older homes and metro areas with more stagnant growth will be less likely to attract the interest of investors. But for many, that first rung on the homeownership ladder – an entry-level, newly constructed home in a fast-growing suburb – might become increasingly rare.

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