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It’s getting harder to sell a home, as rising supply, high mortgage rates and waning consumer confidence conspire to keep potential buyers on the sidelines. Now some frustrated sellers are deciding to de-list their properties and instead offer them on the rental market.
These new rentals are coming in direct competition with institutional investors in the rental space, especially in the markets where those investors are most prevalent.
The largest investors, those with more than 50,000 homes in their portfolios, are highly concentrated geographically. Names like Invitation Homes, American Homes 4 Rent and Progress Residential each hold over a third of their assets in just six U.S. housing markets, according to an analysis by Parcl Labs: Atlanta, Phoenix, Dallas, Houston, Tampa, Florida, and Charlotte, North Carolina. These markets have seen inventory growth of well over 20% in the past year — much of it from former owner-occupants.
“When these home sellers cannot find buyers, they face three choices: delist and wait, cut price to find market clearing level, or convert to rental. The last option creates what Parcl Labs terms ‘accidental landlords’: Owners who enter the single-family rental market not by design, but by necessity,” wrote Jesus Leal Trujillo, principal data scientist at Parcl Labs.
Plan B
Garret Johnson bought his Dallas home two years ago, but recently got a new job in Houston. He thought selling his home last March would be easy.
“There weren’t many buyers, just lookers, and people were biding their time waiting for better rates. [There was] a lot of economic uncertainty in those months, March and April, that we had listed the house, so I think that played a factor as well,” Johnson said.
After a few months, Johnson decided to try putting his home up for rent. It wasn’t his ideal plan, he said, but in just the first few days, he had several offers.
The rent doesn’t fully cover his mortgage, Johnson said, but he recast his loan and put more equity in the home to lower the payments. He also changed his homeowners insurance to a landlord policy for additional savings. Johnson said he doesn’t expect to sell for several years.
“I’ve gotten to be creative, and hopefully the goal is, in the next few years, to start to turn a profit on the month-to-month basis of the rent versus mortgage,” he said.
Inventory rising
The inventory of homes for sale has already been growing steadily over the past year, especially in the formerly hot pandemic migration markets like the Sun Belt. Homes are sitting on the market longer as sellers, used to the heady price hikes of the last five years, are reluctant to lower their prices. As more for-sale supply enters the rental pool, that could limit landlord pricing power.
“You’re not going to see big reductions in rent, but maybe you won’t be able to get 4% or 5% increases on your rent. Maybe it’s just 1% to 2% in some cases,” said Haendel St. Juste, a senior equity research analyst at Mizuho Securities. “But the professional big guys, INVH, AMH, have been getting 4% to 5% renewal rates and 75% retention in their portfolio. So keeping people in the homes at 4% to 5% rent is a key part of their business model.”
This is not, however, the first time this has happened.
“We saw something like this in 2022 after mortgage rates doubled: A huge uptick in the number of people who owned one property besides their primary residence,” said Rick Sharga, CEO of CJ Patrick Co., a real estate advisory firm.
Investors selling
The largest single-family rental REITs are now selling more homes than they’re buying, according to a count by Parcl Labs. That does not, however, mean they’re exiting the market.
“They are deploying more funds into build-to-rent projects, rather than competing with smaller investors and traditional homebuyers for resale properties,” said Sharga, suggesting that doing so limits the threat from those so-called accidental landlords.
That minimizes some of the risk, but St. Juste said the biggest landlords will have to incur some occupancy decline in order to optimize their revenue, as opposed to just slashing rents.
“The incremental risk from this slow selling season is that there could be more supply, you know, come this fall, come next spring, that could limit some of the rental growth upside for next year,” he said.
