Post-pandemic planning: Why entry level homes are a solid rental investment
It doesn’t matter what the current economic state is: The single family rental market is often seen as a reliable choice in times of both calm and instability. And right now, as America opens up after a crushing 1+ year pandemic, single family housing is once again proving why it’s often a go-to investment.
It’s an interesting time. As families emerge from quarantine and seek out affordable entry level homes -- sometimes within commuting distance of an office they’ll soon return to -- they may have a tough time finding what they’re looking for. Why? Because even before COVID-19 hit the world, entry level single-family homes were already in demand -- and in short supply (1).
For the investor seeking out good homes to rent out to those who would rather not make the commitment to home ownership (see millennials as an example), inventory has been a challenge. So, what was the environment that created an ongoing crunch on single family homes -- specifically entry level? Here’s how we got to where we are now.
Entry level home starts took a tumble during the Great Recession
The year was 2004 and housing was the hottest commodity available. Homebuilders were aggressively building hundreds of thousands of homes sized under 1,800 square feet - perfect for entry level buyers and renters. Mortgage standards were loose, and a wave of defaults and foreclosures had not yet hit the markets with full force.
Then 2006 happened, and the housing industry fell apart. When customers started defaulting on their sub-prime mortgages, the homebuilding industry responded by building fewer smaller homes and focusing on larger homes with bigger profit margins. One of the biggest areas to take a hit was the entry level home market.
Then, in 2019, the entry level market started to ramp up again. The upward trend shows that homebuilders, perhaps seeing a massive wave of millennials starting families and looking for permanent digs, began building smaller homes once again (2).
Source: Despite Pandemic, the Need for Smaller Homes Remains, DSNews.com (3).
On the back of a recovery, 3.3 million homes are missing from market
Last year, representatives from Freddie Mac announced that America is facing a housing shortage to the tune of roughly 300,000 per year. The government-backed mortgage company said that the market is already missing 3.3 million homes - and it could get worse as that shortfall grows year after year (4).
So, which states are suffering from low supply? Oregon, Florida, and even California. However, a few states that you would normally associate with large swathes of available land are also feeling the squeeze. Texas, long known for its wide open plains and plentiful housing options, is having trouble delivering what renters and homebuyers are looking for.
The reasons for the shortfall are many. Homebuilders, stung by the Great Recession, haven’t quite made it back to earlier numbers. Lending standards are tighter. There’s a limited number of quality lots and land available where good jobs, schools, and cities are. Lumber costs are soaring.
But that doesn’t mean the single family market won’t make some headway. In fact, Freddie Mac predicts that while construction of 1-unit structures hit a low in 2009, things are coming back. The organization says that in 2021, single family housing starts will see a big boost, hitting almost one million homes (4).
Millennials are starting families -- but are they buying homes?
In the past, starting a family and buying that first home was a dream for Americans of all backgrounds. Now millennials, a huge part of the rental and purchase industry, are abandoning the dream of home ownership altogether and settling into a life of renting.
Source: Apartment List's 2021 Millennial Homeownership Report, Apartment List (5).
A recent survey of millennials revealed that more than 18% expect that they’ll rent for life. Only 42% of millennials own homes by the age of 30 which lags previous generations by about 10%. Another survey showed that the vast majority of millennial renters -- almost 65% -- have saved $0 to buy a house. Only 15% had more than $10,000 saved for a home, while 14% had less than $5,000 (5).
In other words, renting suits many millennials just fine, perhaps making them the first generation to abandon the rule that “home ownership is one of life’s biggest accomplishments.” But judging from the existing situation where it’s much cheaper to rent an entry level home than it is to buy one, they probably won’t be the last (6).
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