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SFR scales up

With homeownership out of reach for many, single-family rentals continue to boom

Single-family rental homes have long been an important piece of the housing economy and in recent years have taken on new importance. Following the housing crisis, more Americans and their families are choosing to rent and have decided that a single-family home is the best option to fit their needs.

In fact, according to the Urban Institute, the 2015 American Housing Survey reports that the majority of renters — 57% — have chosen to live in single-family units (single-unit, single-family homes and two-to-four unit homes). This total outweighs the percent of renters living in apartments (43%) and reflects larger social and economic forces at play.

Demographic shifts have been a major factor in this resurgence in single-family rental housing. Baby Boomers are attracted to the flexibility and low maintenance responsibility of renting a single-family home. Millennials, who are delaying milestones like marriage and home buying, are beginning to form families of their own and look for housing options with more room to grow.

With these shifts, the single-family rental industry has become the fastest-growing segment of the real estate market, in large part due to the features these homes offer. Residents enjoy more space at a lower cost per square foot, backyards for children and pets to play and the option of living in safe neighborhoods and good school districts that might otherwise be out of reach.

PROFESSIONALIZATION OF THE MARKET

Another shift following the financial crisis has been the professionalization of the single-family rental industry. While these professional owner/operators are still a small slice – now about 2% – of the 16-million-home single-family rental market, it is an important shift in the industry. The emergence of these operators has offered residents a new housing option in a lot of markets.

Additionally, the institutionalization of this asset class has presented an opportunity to scale a business model that was historically dominated by part-time landlords who did not benefit from a regional or national platform or industry-level expertise.SFR 1

The professionalization of the market has some real advantages for residents. New technology that has emerged alongside the professionalization of the industry has led to new amenities and services that make the leasing and rental experience better. For example, self-showing lockboxes allow prospective residents to view homes without a property manager on site, and leases can be submitted electronically, sometimes through smartphones. Like most apartments, service requests can be submitted online 24/7.

When devastating hurricanes hit Florida, Texas and Puerto Rico last year, institutional owners’ scale and use of cutting-edge technology platforms proved to be a real advantage that allowed them to mobilize resources and respond quickly.

Many NRHC member companies were able to bring staff and equipment necessary for their hurricane response efforts in from other parts of the country and had reliable networks of in-house and third-party maintenance and construction professionals to immediately begin servicing damaged homes. Additionally, their wide geographic footprints allowed them to quickly rehome families.

It is also important to note that the professionalization of the market is no different than the transition the multifamily housing industry made towards investor owned and operated properties in the 1990s. This has a number of benefits, but chief among them is making the property management process more efficient and resident-friendly by allowing owner-operators to leverage scale to adopt technology-powered solutions for issues ranging from online payments to keyless entry.

THE ROLE OF THE GSEs

Fannie Mae and Freddie Mac play an important role in the housing industry at large and have long supported investors in the multifamily industry. While their presence has existed in both the single-family and multifamily space for some time, the Invitation Homes transaction announced in 2016 was the first of its kind for a large-scale, professionalized owner/operator and signaled the GSEs’ willingness to support this growing piece of the industry.

It’s important to note that this transaction is completely in line with the GSEs’ goal of establishing financing for American families. As the number of renters in the U.S. grows, and as more of those renters are choosing single-family homes, it makes sense for the GSEs to support this important piece of the housing market as well.

Other industry experts agree.

Laurie Goodman at the Urban Institute said in February 2017: “We have no doubt that it makes sense for the GSEs to finance SFR properties. Access to stable, long-term and non-fleeting financing — which allows institutional landlords (both for-profit and nonprofit) to purchase, hold, and stabilize the properties, and run the stabilized properties as a business, rather than flipping them —will be crucial in preserving their long-term commitment to this space. And Fannie Mae’s pilot with IH seems to be a good first step in that direction.”

SFR 2GSE support of the single-family rental industry is not the only solution to current strains on the U.S. housing market. As home prices have rebounded following the Great Recession, more buyers are finding themselves priced out of their desired markets. The reason? An overall shortage of available housing and a lack of new homes being built, which drives up the market price for what is currently available.

As basic economics would dictate, it’s important for local, state and federal policymakers to tackle these dual problems of housing shortage and affordability by fostering policies that encourage growth and housing construction.

We see this issue manifest directly in the current debate in California over the Costa-Hawkins Rental Housing Act.

Since 1995, Costa-Hawkins has effectively allowed cities to put in place rental policies that best meet their regional needs by giving local governments the flexibility to maintain rental control laws in their respective jurisdictions, while at the same time, granting owners in rent control communities the ability to establish initial rental rates when there has been a change in occupancy.

While some municipalities in California have allowed rent control under Costa-Hawkins, history has shown that rent control ultimately does more harm than good. For example, San Francisco and Los Angeles have strict rent control policies in place, and they have experienced a growing housing shortage in recent years.

What California needs are forward-thinking policies that support housing production and alleviate the current housing shortage. Housing advocates who support the repeal of the Costa-Hawkins Act do not understand the unintended consequences this law will have.

Developers and builders alike would be hesitant to invest in new housing construction in areas that are rent controlled because the properties would likely yield smaller investment returns. In fact, the Legislative Analysts of the California Legislature found that, “rent control will do nothing to increase our supply of affordable housing and, in fact, likely would discourage new construction.” Given the significant housing shortage in California, diminished construction would only exacerbate an existing statewide problem.

The National Rental Home Council (NRHC) agrees that renters deserve support and attention from policymakers, but rent control legislation, in the long run, will not alleviate the strain on housing affordability. Instead, policymakers should consider ways to encourage more building and loosen zoning regulations that artificially restrict housing supply and keep prices high for renters.

NRHC member American Homes 4 Rent is looking to remedy the lack of available homes by building new ones specifically to lease in their built-for-rental program. This type of innovation is good for the housing industry as a whole as it seeks to alleviate the housing shortage by increasing inventory and gives families more housing options.

The NRHC also supports public policies to help those who desire to become homeowners reach that goal. In fact, single-family rental homes are part of the continuum to homeownership for many renters. But, homeownership is not necessarily the best choice for every person at every stage of their life.

Renters deserve the same commitment from policymakers that homeowners are afforded: improved access and choice, and the opportunity to reside in a high-quality home. Our members strive to provide those who are preparing for homeownership — and those who are not — with high-quality housing options, no matter where they are on the rent-or-own housing spectrum.

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