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SFR: How Does it Affect Homebuyers?

For Rent Three BHBy now you’ve probably heard of the huge business deal that closed in the single-family rental (SFR) market last week. If not—Invitation Homes and Starwood Waypoint Homes, two of the largest SFR landlords merged. It was a $4.3 billion dollar deal with a combined 82,000 homes in 17 metro areas. Pocket change, right?

The merger brought up important questions among homebuyers and renters, especially considering the Wall Street Journal described the deal as one that will no longer make homeownership essential to the American dream as more consumers choose to rent. According to the Urban Institute, the trend of consumers switching to renting will continue as more people delay marriage and children until their thirties, but that doesn’t mean that Americans no longer wish to own homes nor that there’s reason to think renters will be worse off under new landlords who don’t “care about the carpet or paint color”.

In fact, SFR owned by institutional investors only make up 17.5 million single-family rentals in the U.S., or 40 percent of the country’s rental housing stock. That means the results of this merger will own, at most, 0.7 percent of the 17.5 million units. That equates to 300,000 units.

According to Urban Institute, the SFR market grew quickly in just a few years, but that growth has evened out. At the peak of the crisis, prices were down and SFR investors flocked to the market due to the amount of foreclosed homes. The purchases stabilized the market. It’s almost 10 years later—home prices are back within 1.5 percent of their pre-crisis numbers. Investors want economies of scale to cushion falls in profitability and likely will lead to consolidation of the SFR market.

On average, institutional investors are buying homes that need $20,000 worth of repair due to their more affordable purchase price. They have teams and investors readily available and can buy appliances at bulk prices. First time homebuyers aren’t in that same position. First of all, they likely don’t have $20,000 on hand to make the repairs and secondly, they wouldn’t be able to do it for $20,000 like institutional investors. According to Urban Institute, this means that even though institutional investors may have the cash advantage, they aren’t competing for the same properties as first time homebuyers.

The fourth point Urban Institute makes is they just don’t see a cause for alarm in the new landlords. Rent wont go higher due to these investments—rent is a product of supply and demand, there is no evidence that institutions are worse landlords than more mom-and-pop companies, and the ownership by an institution will likely bring standards and methods to managing the properties—making them, “more like their larger apartment building brethren.”

The SFR market could ease America’s housing shortage, and Urban Institute said the government could encourage that sector to help address it.

“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,” the article said. “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.”

About Author: Brianna Gilpin

Brianna Gilpin, Online Editor for MReport and DS News, is a graduate of Texas A&M University where she received her B.A. in Telecommunication Media Studies. Gilpin previously worked at Hearst Media, one of the nation's leading diversified media and information services companies. To contact Gilpin, email brianna.gilpin@thefivestar.com.

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