With mortgage rates rising, the build-to-rent market is booming
By Camille Manaloto
As we make our way through 2022, the unpredictability of the economy and housing market continues. The Federal Reserve continues to raise interest rates, inflation is soaring, but material shortages are slowly but surely returning to normal. Lumber prices are down to $600 from highs of $1400 earlier this year.
The combination of higher home prices and interest rates is lowering buying power, in turn beginning to stabilize the market. With many potential buyers out of the market, builders are beginning to slowly raise inventory.
After the hot market we experienced last year, this year brought soaring mortgage rates. In the first half of the year, rates were up 2.5 points. But early in July, mortgage rates took an unexpected plunge. According to Freddie Mac, rates dropped significantly on July 7 across all mortgage terms, both fixed and adjustable: 30-year fixed: 5.3% with 0.8 point (down from 5.7% a week ago, up from 2.9% a year ago). 15-year fixed: 4.45% with 0.8 point (down from 4.83% a week ago, up from 2.2% a year ago). 5/1-year adjustable: 4.19% with 0.4 point (down from 4.5% a week ago, up from 2.52% a year ago).
“Over the last two weeks, the 30-year fixed-rate mortgage dropped by half a percent, as concerns about a potential recession continue to rise,” said Sam Khater, Chief Economist at Freddie Mac, in a press release. “While the drop provides minor relief to buyers, the housing market will continue to normalize if home price growth materially slows due to the combination of low housing affordability and an expected economic slowdown.”
Although that unexpected drop came, home prices are still at an all-time high. According to Danielle Nguyen, Senior Manager of research at John Burns Real Estate Consulting, owning a home on average now costs $839 more per month than renting, a difference of almost $200 higher than any point since the year 2000. Just one year ago renting and owning were virtually the same. This is creating a huge shift in the market.
The Build-to-Rent (BTR) market is growing exponentially. Millennials are by far the largest generation, and with millions of millennials entering the market and trying to move up from multifamily properties, BTR properties are a safer and more cost effective option during this time. Unlike multifamily housing, BTR communities are structured as single-family communities. This means no sharing walls with neighbors, having a yard and living in a community. These are all things that millennials who are growing families are looking for.
“While rents have been rising too, the disparity between rising homeownership costs and rising rents has been greatest where home prices have accelerated the most. Raleigh-Durham, Nashville, Denver, Tampa, and Phoenix have all witnessed the biggest disparity in increasing home ownership versus rental costs,” said Nguyen.
As is with many changes, there was hesitation from builders to sell to rental investors. But with buyers dropping from the market left and right, and builder confidence dropping from 67 in June to 55 in July, according to the National Association of Home Builders (NAHB) Market Index, builders have now begun to work with many of these investors in order to get rid of inventory quickly.
“Not only do these communities allow builders to continue meeting the demand for households migrating from the coasts, but keep their operations humming as they partner with BTR experts, launch their own BTR divisions or sell the entire community at once to institutional investors,” said Patrick Duffy in his column this month. “Some recent estimates put the share of new land acquisitions for proposed BTR communities as high as 10% of the total market.”
As single-family housing slows, BTR and multifamily rentals are growing at record pace. Though headwinds have built, housing market potential still remains strong, and nearing early 2019 levels explained Mark Fleming, Chief Economist at First American Financial Corporation.
While the housing market cools, affordability continues to be the number one concern, but economists speculate that the nation will likely not go into a huge economic recession. Adjusting to a post-pandemic market may be challenging to navigate, but builders and buyers can be hopeful of the outcome.
Camille Manaloto is the Editor of Builder and Developer. She can be reached at email@example.com.