Dive Brief:
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Small rental housing investors could make a profit on at least 70% of homes purchased and then rented out in 25 of the 35 biggest U.S. housing markets, according to Zillow. In 17 of those markets, 90% or more of homes could be bought and rented out for profit.
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In the priciest coastal markets, rent payments won’t equal or surpass the fixed costs of ownership. This is especially true in San Jose, CA, where only 5% of homes can be rented at a profit.
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Unsurprisingly, the markets with the smallest share of homes that can be rented for profit also rank among the most expensive in the country. The full cost to buy an average home in the U.S. equals 11 years of the median national rental payment. In the most expensive markets, more than 20 years of rent are required.
Dive Insight:
Home prices are reaching record highs as inventory contractions and population increases in major markets fuel stronger demand for housing.
A separate report from Zillow this week found that the number of for-sale homes declined at the fastest rate in four years, with almost 9% fewer homes on the market today than there were in June 2016. West Coast markets, especially, are feeling the strain from tight inventory with San Diego reporting 26% fewer home listings than the year before and Seattle showing listings down 22%. Both cities were outpaced by Columbus, OH (down 30.1%) and Minneapolis (down 28.7%) as well as fellow California city San Jose (down 29.2%).
Growth in single-family rentals is partially to blame. Following the housing market crash, many U.S. households transitioned from owner-occupied homes to rentals, leading investors to snatch up the abandoned properties. Between 2005 and 2016, the number of single-family rental homes increased by 6.2 million, according to Zillow, while the number of owner-occupied homes dropped by 680,000. Since then, new supply hasn’t been able to meet renewed demand or offset the number of properties claimed by renters.
Demand for single-family rentals now largely stems from younger, would-be buyers who face affordability barriers to homeownership, such as student loan debt and slow wage growth that make it difficult to save for a down payment. Rising home prices are another compounding factor, with the median price of an existing home rising 5.8% year-over-year to $252,800 in May, according to data from the National Association of Realtors.
These factors, along with millennials’ decision to delay the lifetime milestones that typically trigger a home purchase, are driving up the share of built-for-rent single-family units. These units made up a 4.1% share of total single-family starts in Q1 2017, the National Association of Home Builders reported.
Today, single-family rentals overall (built-for-rent and converted), account for slightly more than one-third of total U.S. rental housing. However, most of the activity in that segment comes from existing single-family homes converted into rentals, with 56% of growth in rentals from 2005 to 2015 being attributed to single-family units.