Nationwide, rents have been climbing since the pandemic, but it is still cheaper to rent than to buy in most of the country. As such, in some states, building houses-to-rent is becoming a trend.

 

Home prices continue to soar with the median sale price of a U.S. home gaining 32 percent in the first quarter of this year from the same time in 2020. Throw in the climb in mortgage interest rates and there is no wonder that a record number of Americans believe it is a terrible time to buy a house, according to a Gallup survey. Renting seems to be the only alternative.

 

But the unfortunate fact is that rents are growing faster than incomes in the U.S. The trend began two years ago and is gaining steam. The reasons are simple. As the pandemic abated, the number of U.S. households grew by 1.48 million. Young adults, who had been sheltering with their parents at record numbers, began moving out and finding their places. Unfortunately, a soaring housing market locked out many of these would-be first-time home buyers.

 

That has forced many to rent while waiting for interest rates and housing prices to decline. At the same time, many local governments and management companies that had limited rent increases during the pandemic began lifting those rent controls. As a result, landlords are jacking up rents to make up for two-plus years of rent freezes just as the demand for rentals has increased.

 

In addition, the trend toward working from home opened opportunities for white-collar workers to move from pricey locations to more affordable areas. That wealthier demographic trend has driven rental prices higher in areas where there was not enough inventory to satisfy this influx of demand.       

 

In the first quarter of 2023, the average renter, according to Moody's Analytics, needs to spend almost 30 percent of their monthly income on monthly rentals. That sounds like a lot, and it is, but that number is down from last year's historical peak when the rent-to-income ratio was higher than 30 percent.

 

Last year there were several urban centers where the burden of high rents was overwhelming incomes. As you might imagine, cities such as New York, Boston, Philadelphia, Houston, Palm Beach, Miami, Los Angles, and Northern New Jersey are experiencing rent increases that are above the typical mortgage payments.

 

Entrepreneurs in the building and construction industry are recognizing the opportunity in the rental markets. Their answer is build-to-rent (BTR) housing. BTR allows the renter to move into a brand-new home without the need for a huge down payment, or a long-term lease. In many cases, that rent includes amenities and professional property management.

 

In most cases, build-for-rent homes are clustered together and form a community like an apartment complex but not always. Depending on the locale, some communities consist of townhouses or cottages, or even detached family houses.

 

Builders like the concept, since the community projects can be put together in bulk and all at once. Construction can be accomplished faster and without checking in with the home buyer, who may have countless questions, changes, and thus delays. Potential landlords like them as well since each house is designed for efficiency, making repairs and maintenance easier.

 

There is a housing shortage in America. Experts believe the nation needs anywhere from 3 to 6 million more homes. Build-to-rent homes won't satisfy that demand overnight, if ever.

 

It is early days in the BTR market since there are only 115,000 units in the construction pipeline throughout the U.S. Arizona, North Carolina, and Texas lead the nation thus far in construction and many municipalities are still struggling with how to zone these communities. In 10 states there is no construction planned at all including Oregon, Massachusetts, and West Virginia, according to the National Rental Home Council. As rental prices continue to climb, however, so too will build-to-rent housing in my opinion and that is a good thing for both builders and renters.  

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.