In a $4.3 billion deal announced last week, two of the country’s largest landlords of single-family rentals (SFRs) agreed to merge. The combined company formed by Invitation Homes and Starwood Waypoint Homes will own about 82,000 homes in 17 metropolitan areas.
Referencing the historically low homeownership rate, the Wall Street Journal described the deal as a long-term corporate wager “that homeownership will no longer be an essential component of the American dream and that more people will choose to rent.” Others expressed concern about the plight of renters under landlords who “don’t care about the carpet or the paint color.”
It’s true that there are more renters by choice than there have been in years past and that this trend will continue as more people delay marriage and have children until well into their thirties. But Wall Street’s move to meet this need for SFRs does not indicate that millions of Americans no longer wish to own homes and access the wealth-building benefits of homeownership. And there’s no reason to think renters will be worse off under these landlords.
We offer four reasons why institutional investor–owned SFRs pose no threat to homebuyers or renters.
1. Single-family rentals owned by institutional investors compose a tiny sliver of the housing market.
In 2015, there were 17.5 million single-family rentals in the United States, accounting for 40 percent of the country’s rental housing stock. But institutional investors, like the giant company formed by this recent merger, own, at most, 0.7 percent of these 17.5 million units, or less than 300,000 units.
Meanwhile, 45 percent of rental units are owned by investors that own just 1 unit, and 85 percent of rental units are owned by investors that own 10 or fewer units.
2. Single-family rentals owned by institutional investors won’t grow quickly anytime soon
Although this market segment grew quickly in just a few years, the fast-growth days are over. Institutional investors entered the SFR market at the peak of the housing crisis, attracted by the bounty of affordable homes made available by the foreclosure surge. These purchases played a stabilizing role, creating a market for languishing homes and a floor for plummeting home prices.
Nearly a decade later, however, the home price free fall is over, with homes back to within 1.5 percent of their precrisis prices nationally. With purchase bargains gone, the next logical step is for these investors to seek economies of scale to cushion the fall in profitability. This will likely lead to more consolidation in the SFR market. Larger investors could also start buying units from smaller investors, although it’s hard to know how much this will happen.
3. Most potential homebuyers would not want to buy the homes investors are interested in buying.
Institutional investors, on average, buy homes that need about $20,000 in repairs because these homes tend to be more affordable and investors are well suited to make extensive repairs. The investors have cash on hand and teams ready to build new bathrooms, make substantial kitchen upgrades, install new windows, and so on. They can also buy appliances, carpet, paint, toilets, and the like at bulk prices to bring down the cost of these repairs and upgrades.
A single family—particularly a first-time homebuyer—on the other hand, isn’t usually prepared to spend $20,000 on repairs or upgrades right away. Moreover, it would cost most borrowers more than $20,000 to make the repairs an institutional investor could make for that price. In addition, financing for these repairs is difficult to come by, and most of borrowers’ cash on hand goes into the down payment.
This difference means that although institutional investors may have a cash advantage, they generally aren’t competing for the same properties as first-time homebuyers.
4. Institutional investors are likely to be fine landlords.
From the renters’ perspective, we see little cause for concern. These investments don’t push rents higher because rent prices remain a product of supply and demand. And there is no credible evidence that institutions make worse landlords than mom-and-pop companies. These investors will, by necessity and competition, bring professional standards and methods to managing these properties, making them more like their larger apartment building brethren.
What does this deal tell policymakers about US housing today?
This deal should remind policymakers that single-family rentals are here to stay and could be an important component of an affordable housing strategy.
We face an imminent crisis in housing our nation’s families. The government could encourage the SFR sector to help address this crisis, as we recently discussed when we analyzed the April 2017 deal by the government-sponsored enterprise Fannie Mae to back a $1 billion loan to Invitation Homes.
In the meantime, we should remember that although homeownership remains the best way for most Americans to build wealth, there is no “ideal” homeownership rate. Most families cycle through homeownership and home rental as their situation changes. And as our country’s demographics, economics (the ease with which one can save for a down payment or have the income stability to buy a home), and the timing of major life events (marriage and child bearing) change, the homeownership rate will change accordingly.
Our goal should not be to make as many homeowners as possible but to ensure that any creditworthy person can become a homeowner when their financial means and other circumstances make them ready to do so. One of the biggest impediments to this dream is how hard it is to qualify for a mortgage today. The merger of institutional SFR investors poses no threat to this dream.