The steep drop in September home sales reported Wednesday steered attention to the housing recession, adding to expectations of a broader economic malaise. Real estate players of all sorts are battening hatches as inflation pressures and rising interest rates gnaw into home prices and demand.
Among the groups to watch as real estate pulls back is a new investor class in the single-family home rental market.
Institutional landlords, major players for decades in the multifamily space, are now exerting an increasing influence in a number of the U.S. markets for detached single-family homes. In a landscape where rental homes were traditionally owned by individuals or small businesses, these newer players are larger real estate corporations. At the top of the heap are publicly traded names such as Invitation Homes, American Homes 4 Rent and Tricon Residential — each of which owns tens of thousands of rental homes.
The New Single-Family Home Rental Market
Institutional owners still comprise a relatively small portion of the overall market, about 350,000 units, or 1.5% of the existing 23 million single-family home rental units, according to the National Rental Home Council. But in certain target markets, the concentrations are much higher.
For real estate sellers, this represents a vast new pool of buyers, backed by securitized bonds enabling them to pay cash to bypass wieldy mortgage-lending hurdles. Among smaller landlords, the institutions represent a tough new competitor, in rental markets as well as in the purchase of new properties. For traditional homebuyers, the rise in cash-rich competition often means fewer available homes and higher bids on those available.
For renters, the impact remains uncertain. At one end of the scale, the industry contends that the influx of single-family home rental stock means more and more attractive rental opportunities. But those properties come at a price, with monthly rental rates often at or above monthly mortgage costs. And because it appears that, in many cases, the most vulnerable, lower-income communities are most directly targeted by institutional buyers, questions are growing about how rents, evictions and foreclosures could play out under this new management.
The Rising Institutional Landlord
For regulators, the institutions represent a new layer of oversight challenge. Factors such as securitized borrowing and high-speed online buying combine with bulk sales from both government-sponsored entities led by Fannie Mae and, just recently, national homebuilders with surplus housing inventory, to further stack the deck against the already underdogged first-time homebuyer.
North Carolina's Charlotte Observer detailed one case in which an institutional buyer paid a 12% premium to the seller's asking price — tough to compete with for most working-class home shoppers, and hard to refuse even for community-minded sellers.
These sorts of questions prompted the House Financial Services' Oversight & Investigations committee to hold a June 28 hearing titled "Where Have All the Houses Gone? Private Equity, Single Family Rentals and America's Neighborhoods."
Individuals, and individual investors who own one to four properties, make up the bulk of America's homeowners. The national homeownership rate, or the proportion of homes that are owner-occupied, stood at 65.8% in the second quarter of 2022, according to Census Bureau data. That's down from 67.9% in Q2 2020, which was the highest level since the third quarter of 2008.
Before 2008, investors with five or more properties owned about 10 million single-family rental homes, according to information presented in the House report. That was a bit less than 8% of the 129.64 million single-family homes late in 2007, based on Census Bureau data. Until 2011, no single investor in the country owned more than 10,000 properties, the House committee reported.
Large Buyers Take Advantage Of Crises
By the end of 2021, Tricon Residential owned 29,000 single-family home rentals, primarily in the U.S. Sunbelt. That was up from about 11,860 units in 2018. Invitation reported owning 80,000 homes in 16 markets, largely unchanged since the end of 2018. American Homes for Rent owned 57,024 properties in 22 states, up from 52,552 in its December 2018 filing.
While the overall number of homes owned in some cases may not change a great deal, that masks the fact that homes are constantly being sold off in securitized packages. Those securities, backed by single-family home rental properties, generate the capital used to buy additional homes.
Corporate ownership of single-family home rentals rose 3% a year starting in 2010, the House Committee said in its June hearing. Over the past decade, purchases by buyers owning five or more properties ranged from 15% to 17% of total single-family home sales, according to market research firm CoreLogic. Since 2017, such investors have purchased about 1.1 million homes each year.
Large investor purchases rose dramatically after the start of the pandemic. Buying by owners of five or more properties reached 24% of all single-family houses sold nationwide last year, CoreLogic data showed. The purchases peaked in February 2022, spiking to 28% of total single-family purchases. That was the highest monthly share since 2011, in the buying frenzy that followed the housing meltdown of the Great Recession.
In March, the Federal Reserve launched its monetary tightening program, aimed at bringing down inflation. It ramped its rate hikes higher in May through September. That has driven mortgage rates higher, with a 30-year fixed-rate loan now near 7%, more than double the year-ago levels.
Consumers Under Increasing Pressure
But concerns about higher housing prices were already prevalent. Home prices began backing off in July — the first monthly dip in nearly three years.
Rental increases that had lulled between 2% and 4% per year rose above 5% in April 2021 and topped 12% by the end of that year, according to CoreLogic's Single Family Rent Index. In April 2022, just after institutional purchasing in that segment peaked, rents grew 12.9% year over year.
Consumers were clearly under pressure from multiple angles. A Freddie Mac consumer sentiment report for August showed 96% of respondents indicated that price increases (of all sorts) in the past 12 months had affected their household spending. They were saving less, delaying essential and nonessential property repairs, and searching for roommates to share costs.
Purchases by larger landlords slowed slightly, falling to around 20% of total detached single-family sales as of June, according to the most recent CoreLogic data available.
But the run-up in home prices made homeownership even more unattainable to many. A full 68% of respondents said they were less likely to buy a home than they were a year earlier. Only 32% were more interested in purchasing a house in the current market, survey data showed.
"People at the age that we would typically expect to see buying their first homes are increasingly being priced out and continuing to rent," said Zillow senior economist Nicole Bachaud. "We are seeing builders increasingly focus on the rental market in reaction to this dynamic,"
Securitizing The Single-Family Home Rental Market
Housing markets in the Sunbelt — throughout the Southeast, Southwestern and Western U.S. — have been favorite target markets for institutional buyers. Much of that focus was on communities that experienced high foreclosure rates during the 2008 financial crisis, the House report notes.
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That crisis was triggered by many factors. But the initial damage hinged on the securitization of mortgages into largely unregulated high-yield bonds sold by U.S. financial institutions to clients worldwide. The failure of those instruments, and the mass foreclosures that resulted from the crisis, disproportionately affected lower-income homeowners and homeowners of color. Many of these homeowners had been targeted with subprime mortgages, often the first to fail as the U.S. economy came under pressure.
The crisis saddled the federal government with the prospect of tens of thousands of U.S. homeowners facing eviction and possible homelessness. As an emergency measure, a cohort of federal agencies spearheaded by the Federal Housing Finance Agency and the Treasury Department launched a program in 2012 enabling large, prequalified real estate investors to purchase pools of foreclosed properties in many of the hardest-hit U.S. urban areas. The deals required the investors to rent the properties for a specified number of years.
This, in turn, gave rise to a new sort of bundled financial instrument: the rental-backed security. As with mortgage-backed securities, these arrangements are complex. They involve the landlord borrowing against large portfolios of single-family rental homes and issuing bond tranches to repay the loan, while using the loan capital to purchase additional properties.
Sales of such rental bonds averaged about $5 billion a year in 2013 through 2019, according to Kroll Bond Rating Agency. As the pandemic kicked in, sales of single-family home rental bonds shot 133% higher, to nearly $10 billion in 2020. Sales in 2021 shot an additional 89% higher. In 2022, sales topped $12 billion by August but appeared headed for a slowdown.
Despite the shifting market, "single-family home rental occupancy rates are high and stable," according to a statement released by David Howard, executive director of the National Rental Home Council. Howard says that more than 98% of homes currently available are leased.
Rent Stress Arises
Meanwhile, while half of Freddie Mac survey respondents received raises in the last year, 30% said their increased wages weren't enough to cover their higher rent. Roughly 57% of those who saw rent hikes last year report they're extremely or somewhat likely to miss payments. And 69% say they're concerned about having to move because of price increases.
A total of 8.5 million people were behind on rent at the end of August, both in apartments and single-family home rentals, according to the Census Bureau's Household Pulse Survey. The survey was initiated in April 2020 to track and show the pandemic's impact on consumers. Some 3.8 million of respondents say they're somewhat or very likely to be evicted in the next two months.
What Caused The Buying Boom?
For homebuyers, rising home prices combined with tight credit for individual buyers as the pandemic and inflation pressures hit consumer wallets. And federal policies meant to shore up the housing market actually did more harm to individuals than good, the House committee said.
Large institutional investors have several advantages over individual homebuyers when competing in the housing market. Deep pockets and access to capital markets allow them to outbid individuals and smaller investors. The ability to pay with cash is more attractive to sellers and banks than regular Americans using a mortgage, particularly as inflation drives mortgage rates higher.
Another new factor: the rise of tech companies and iBuying (instant buying) services that facilitated housing consolidation and rapid purchases, the House report said.
In iBuying, companies like OpenDoor and Offerpad use algorithms to quickly purchase homes for cash using their digital platforms. These purchases are funded by capital raised from securitization from hedge funds, pensions, high-net-worth individuals and institutional investors. IBuying acquisitions doubled from 2019 to 2021 and accounted for 1% of all home purchases last year.
Many of those companies turn around and resell instantly purchased homes to institutional investors. From 2019 to 2022, the share of iBuying purchases resold to investors rose to 38% from 22%, CoreLogic says.
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Lower-Price Homes, More Expensive Rents
In October 2021, the Subcommittee on Oversight & Investigations surveyed the five largest owners of single-family rental homes in the U.S. The list includes Invitation Homes, American Homes 4 Rent, FirstKey Homes (owned by Cerberus Capital Management), Progress Residential (owned by Pretium Partners) and Amherst Residential.
Not surprisingly, the committee found the companies generally focused on areas with lower home prices and higher rents. The average population across the companies' top 20 ZIP codes was 40.2% black, over three times the Black population share in the U.S. The institutional buyers tended to purchase homes in neighborhoods with 30% more single mothers.
Between 2018 and 2021, the companies surveyed saw their total number of tenants behind on rent and fees increase almost twofold. The number of tenants behind on rent rose from 11.3% to 19.1% in the three-year period, while the number with fee arrears increased from 10% to 20.7%.
A Chicken-Or-Egg Issue
The House Committee claims that institutional landlords maximize profits, which leads to higher rent increases, inflated fees and diminished housing quality over time.
But Dr. Jenny Scheutz, a housing expert with the Brookings Institute, testified at the hearing that there's no proof investor ownership leads to diminished community quality. While institutional investors own a small share of the national rental stock, they are more concentrated in some metro areas and neighborhoods, she said.
Scheutz contended that concentrated property ownership isn't a new phenomenon. And local real estate companies or even individual investors can acquire enough properties within neighborhoods or price niches to wield some market power.
Thomas Malone, an economist at CoreLogic, agrees that it's unclear if large investors are driving prices. "There is a high correlation between investor share presence and prices, but no strong research has been able to disentangle investors from other factors that raise prices," Malone said. "So we don't know if investors are creating or chasing price increases. It's a chicken-or-egg issue."
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Large Landlords, More Robotic Evictions
However, scattered evidence suggests that automated management systems used by corporate landlords tend to put tenants at higher risk of eviction, and make it more difficult to hold the evictors accountable.
A 2018 study of post-foreclosure single-family rental homes in Atlanta found large landlords were 68% more likely to file for evictions than small landlords. A 2020 study in Boston found large landlords were responsible for 45% of all evictions in 2015 and 2016, despite representing less than 0.5% of landlords and 32% of rental homes. In contrast, owner-occupied buildings only represented 10% of all evictions, indicating smaller landlords are more willing to work with their tenants, the House found.
From March 2020 until January 2022, corporate landlords filed 168,000 evictions, the Committee says. At least 70,000 of those occurred between September and May of 2021, failing to recognize that a federal eviction moratorium was in effect.
From October 2020 to March 2021 in Charlotte, N.C., 90% of evicted tenants in three of the city's major ZIP codes rented from large landlords, local reports found. The three ZIP codes in the area's Mecklenburg County have a 51% share of Black residents, compared with 31% countywide.
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So Why Are Single-Family Home Rental Rates So High?
There is general agreement that, overall, corporate ownership is a symptom, not a cause, of a larger structural problem.
"Especially with many more people working from home, and with no quick fix in sight for dismal affordability in the for-sale market, it appears likely single-family rentals will continue to be in high demand," Zillow's Bachaud said.
Rental housing is an attractive financial investment because of strong demand and limited supply. The demand for rental and owner-occupied housing jumped over the past decade due to job growth and rising incomes.
"Since the Great Recession, the U.S. has not built enough housing to keep pace with demand, leading to historically low vacancy rates and rapidly rising costs," Scheutz said. "While pandemic-related supply-chain issues are a part of the problem, the underproduction of housing reflects a longer-term structural problem, especially in high-opportunity communities."
Freddie Mac data from a June research publication attributed skyrocketing prices to a surge in first-time homebuyers, record-low interest rates and tight supply stretched even tighter as building slowed during the pandemic. There are 18% more people age 25 to 34 than in 2006, representing 46.1 million potential first-time homebuyers, Freddie Mac said.
While interest rates on 30-year fixed-rate mortgages dropped from 4.6% in 2018 to a record low of 2.7% by the end of 2020, similar drops have historically resulted in noticeably higher home price growth, the data shows.
Who's To Blame?
The federal government clearly helped fuel the rise of institutional ownership through bulk sales of homes and enabling securitized bond sales. But in most cases, local policies — including landlord-tenant, fair housing and zoning laws — play a role. One favorite tool among local and state governments is Opportunity Zones, which offer capital-gains exclusions for investing in economically distressed areas, promoting gentrification.
"Private equity firms and other institutional investors benefit from tight housing supply, but they did not create the problem," Scheutz testified. "These policies, which directly reduce the supply of available homes and increase landlords' profits, are politically popular with many existing homeowners and local elected officials."
Single-Family Home Rental Boom Coming To An End?
Monthly data from online broker Redfin for August found the average U.S. home selling price fell below the asking price for the first time in 18 months, coinciding with the surge in mortgage rates. And the share of institutional single-family home purchases fell to 20% in June, down from the 28% peak in February. Malone says this is more likely due to seasonal patterns than the interest-rate increases.
"However, investor presence has been correlated with price increases," he said. "And given that prices have begun to see slowdowns that go against seasonal patterns, I reckon that we won't see investor purchases rise for the next few months."
Malone says easy money is drying up in capital markets in a similar way to mortgages. Investors are likely to move out of single-family home rentals and consider a broader range of asset purchases, while homeowners still have a major lifestyle component to their purchasing decisions.
"However, decreased competition from investors might not be much of a relief to buyers who are still facing the same high prices but with steeper interest rates," Malone said.
All of the publicly traded companies mentioned in the story were contacted, but either declined to comment or did not return comment in time for publication.
