Noelle listed her home on a Thursday last August and accepted one of many offers above her asking price the following Tuesday. The 36-year-old auction house employee wanted to take advantage of the red-hot real estate market to sell her 10-year-old family's home to earn enough money to buy her dream home. She planned to live in a nearby Long Island rental home for six months to wait for prices to calm down and better options hit the market. Now Noelle thinks it could take two years, and she's even considering buying a fixer-upper to give her family options.
"This will be a different summer than we expected," Noelle told Recode. Her old house had a swimming pool and a large backyard. Her rental house has a small backyard, no pool, and is not as big as the four-bedroom colonial room she had.
Noelle, who has asked us not to use her last name, is one of millions of Americans struggling with the double-edged sword of a booming housing market. The seller's market is making those who already own a home even richer, while high prices make home ownership further out of reach for many Americans. The housing boom, in turn, is creating a new population of tenants: people who could have afforded a home in recent years, but are now being priced.
While some people would rather rent a house than buy one, the trend of renting out houses cannot be separated from the high price of houses, forcing many people to rent what they cannot buy. House prices are astronomically high, yet houses are being pulled off the market faster than ever. In March, the average single-family home in the US was sold for one record $ 335,000 and typically only spent 18 days on the market (it took twice as long in the already hot market in March 2019, when the median price was $ 261,500), according to the National Association of Real Estate Agents.
Recently, the pandemic and the premium it exerted on private indoor and outdoor space has boosted demand and prices. But like many things, this was an existing trend that the pandemic was only accelerating, and it has its roots in a confluence of factors from an aging millennial population to an influx of private equity.
What drives up the prices of houses?
According to the National Association of Realtors, about 5.6 million single-family homes were sold last year – more than ever since the housing bubble – and prices of those homes were 9 percent higher than a year earlier. The organization expects average home prices to rise by another 9 percent this year – another giant leap from the typical 3-5 percent annual price increase and well above the rate at which people's incomes are growing.
While this was not the cause, the pandemic has accelerated those costs, as schooling and working from home made having a nice, large living space all the more important.
"It reminded us all of the importance of home and how essential it is to have a safe place where we can protect ourselves from the outside world," Zillow Group chief economist Chris Glynn told Recode.
The pandemic allowed subgroups of employed Americans – usually those who had more paid work in the first place – to save money for a down payment because there was less for them to spend their money on.
"It's like everyone was locked up in their house and forced to rescue, which is a homebuilder's dream," said John Burns, CEO of his eponymous John Burns Real Estate Consulting, Recode said.
Coupled with historically low mortgage interest rates, the past year has encouraged many Americans to try their luck by buying a home.
The reasons are also demographic. Millennials, who use the largest living cohort, have arrived at the age of forming new households and buying their first and even second homes (although that milestone was reached later than in previous generations). And while millennials are flocking to the housing market with growing families, the supply of homes has not been enough to keep up.
Many people, including older Americans who don't move as often as young people or who were afraid of letting people visit their homes during the pandemic, are holding on to their homes longer, meaning many existing homes – which make up the vast majority of home sales – have not entered the market.
Additionally, while the construction of new houses, while ramping up in recent times, has been depressing since the Great Recession devastated the construction industry. High timber prices are also slowing down and driving up the cost of new housing.
Finally, investors' interest in renting out single-family homes as an asset class has led them to buy up much of the housing stock individuals would ever have had. Buying rental properties means that there are fewer owner-occupied properties to live in, which by extension has led to more potential buyers taking up rent.
Investors – including everyone from individuals looking to make an extra income to pension funds to foreign governments – compete with private individuals to buy houses. And it may be more attractive (and faster and safer from a financial standpoint) to sell an entire development to investors in a single-family rental business than to a range of individuals.
"Now they are selling many of these homes in bulk for rent because of institutional money involved," said Ivan Kaufman, founder and CEO of Arbor Realty Trust, which finances commercial real estate. "So it has exacerbated the lack of supply of homes for sale."
The emergence of single-family homes
During the Great Recession, when the housing bubble surfaced and millions of Americans foreclosed on their homes, investors came in to buy those homes at a discount. The low prices made it feasible for large companies to enter a market controlled by moms, usually individuals who owned and maintained a single or a few rental properties as an additional source of income. New technologies also made it easier to price and buy real estate across the country, rather than relying on local experts, and to rent and even maintain real estate.
Private individuals still dominate as single-family tenants, but businesses and corporations are accounting for a larger share of the pie. In 2018, the last year available for this U.S. census data, companies and partnerships accounted for about 16 percent of single-family rental property, while real estate companies and real estate mutual funds controlled a growing 2.3 percent. Now, according to Burns, about 20 percent of all home buying activity comes from investors, who think that number is increasing. Many of these investors will rent out those properties instead of living in them themselves. And a growing 4.5 percent of new home construction is being purpose-built for rental, more than double the historical average, according to Arbor Realty Trust.
Institutional ownership of these rental properties can be a good or bad thing for renters, depending on how you look at it. Business ownership means that you can probably get in touch with someone around the clock about repairs and not have to worry about your landlord being on vacation. But it also means rents will definitely go with the market (while a mom-and-pop might leave rents alone for good renters).
Either way, single-family homes are becoming an increasingly important way of housing the aging millennial population.
"Consider the sheer size of this population," said Selma Hepp, deputy chief economist at CoreLogic, a real estate analysis company, said. "Buying more of them and more of them looking for rent."
But tenants outnumber buyers. The number of tenant-occupied households has increased 29 percent since 2000, according to estimates by John Burns Real Estate Consulting based on Census data, while the number of owner-occupied households grew only 17 percent. Kaufman of Arbor said more than half of those tenants are renting out houses instead of apartments – a long-lasting trend expected to intensify after the pandemic. About 60 percent of new single-family tenants come from cities, driven by the same trends driving the housing market.
Stocks at single family rental companies such as Invitation Homes and American Homes 4 Rent are unprecedented. The occupancy rate of single-family homes is at a generation level of more than 95 percent.
Single-family homes fit the desire to live in a home without the expense of actually buying it.
"You have an imbalance between supply and demand, and the rental market is an option for people who cannot afford to buy a home," said Kaufman.
Monthly housing costs are much lower for single-family homes compared to single-family home purchases, said Harvard & # 39; s Joint Center for Housing Studies, and the typical income of families living in those rental properties is also more modest. And while rents are on the rise, they are not rising nearly as fast as the prices for buying a home. Home prices were up 17 percent in February from a year earlier, while single-family rents were up less than 4 percent, according to data from CoreLogic.
Of course, with the higher housing costs of homes bought, comes the equity of those homes that people can later sell – an important way to build wealth. The rise of single-family homes is one of the many trends predicting the erosion of personal property. Thanks in part to digitization, instead of owning everything from music to farm equipment, people rent, which ultimately means they have less control over what happens with that stuff.
What all this means for the future of housing
The lightning pace of house price increases will continue until there is enough supply to meet demand, which Lawrence Yun, chief economist of the National Association of Realtors, expects sometime next year.
"In any case, next year the multiple offers will disappear," said Yun, referring to the situation of receiving numerous offers above the asking price. "But I think prices will be higher next year, so it's a tradeoff."
The problem is, with the notable exception of the Great Recession that was triggered by a housing bubble, house prices generally tend to rise. And this housing boom is very different from the previous one in the basics: people bet more money and their creditworthiness is high, so the chance of a crash is low.
Remember, the US was also in recession during the pandemic, when house prices had skyrocketed. So even if that growth slows to normal levels in the low single digits, it will still be up 20 percent in the past two years alone, putting home ownership further out of reach for many Americans whose income are not grown in lockstep. When people who have just sold their homes and have excellent credit get into trouble, that's bad news for the rest of America.
"As homes become unaffordable, more and more people are dropping out of the home buying race," said CoreLogic's Hepp. Fewer people in the home market would, in turn, cause prices to drop, she said, but for many it could be too late.
Under all this pressure, home ownership, which is currently at a respectably high level of 65.6 percent, could begin to decline. It's already down from about 68 percent last year, although there were some issues with collecting census data during the pandemic, meaning the true rate is unclear.
What's more obvious is what a lack of home ownership could mean for Americans.
"It creates a wider gap between the haves and the have-nots," said Yun. “Homeowners get significant capital gains. Tenants are excluded. "
It could be create the existing low home ownership worse for black Americans. Yun pushed for more housing construction to help alleviate the problem.
One possible relief valve in all of this is the potential for US office workers to work from anywhere. That causes many Americans to try to buy homes in areas like the South and Southwest, where the costs are not that high and where their pay for remote work can go further.
Disconnecting people from their offices could lead to a "major realignment" of where people decide to live, said Glynn van Zillow, "in view of locations they may never have considered before." He sees a lot of interest in places in the Sun Belt, such as Austin and Charlotte. Of course, just because people can work from home doesn't mean their bosses will let them do this forever.
For those hoping to stay where they are and buy a new home, Yun suggests 'maneuvering gently' and including things as an emergency clause that the sale will only go ahead if they are able to get another home.
And if that doesn't work, they can always rent.