This feature originally appeared in the March issue of MReport.
A new decade inevitably brings new trends, challenges, and obstacles for the residential investment community to overcome. For this month’s edition, MReport spoke to subject-matters from Auction. com, Carrington Mortgage Services, Pintar Investment Company, PropertyWare, and more about the issues facing the residential investment community.
Read on for insights into the increased prominence of single-family rental spurred by ongoing affordability challenges, the rise of build-for rent, the potential of HUD’s Opportunity Zones, and more.
Affordability isn't What it Used to Be
The affordability crisis that has a stranglehold on most of the nation shows no signs of relinquishing its grip. The National Association of Realtors said in January that home prices rose 3.4% to $299,995. Prices in 18 metros rose by more than 10% year-over-year. Rising home prices are causing the popularity of singlefamily rentals to soar for many Americans. The Census Bureau reported that 11,000 single-family built-for-rent starts occurred during Q4 2019.
Josh Hartman, CEO of NexMetro Communities, said in an interview with NPR in late 2019, “What we were shocked to find out was it was people that had great credit, they had money for down payments, they had great incomes but they just didn’t want to own a home. They were a lifestyle renter, renter by choice.” Jeff Pintar, CEO and Founder of Pintar Investment Company told MReport that it is not just the millennials or Gen Z buyers—the prospective homeowners hit hardest by financial constraints— who are turning to the rental market. Rather, these changes are impacting all sectors of possible homebuyers.
He added that there is a trend toward wanting to live in a single-family home, where owners can have a garage and a yard, as opposed to sharing walls and a parking structure. This is driving more Americans who chose to rent toward the single-family side of the market, and away from multifamily options such as apartment homes.
Waking up From the American Dream
“It’s just not the same quality of life as you get living in a single-family home. For the people that are renting, there’s a preference to live in a single-family home than there is an apartment complex, and as the investors have become more professional and reliable, that that is just continuing to grow,” Pintar said.
Inaas Arabi, VP, General Manager, PropertyWare, a RealPage company, said younger generations are more mobile and are more likely to move than prior generations. He added younger generations want “flexibility” when it comes to their housing options, as renters are able to cancel a lease or quickly move to a new location.
“I believe this is because they still want the home ownership experience, but they certainly do not want the financial burden of that experience, so they still want the single-family home,” Arabi said. “They still want the yard, they still want the maybe better schools, they still want to be part of an HOA or a community or a subdivision, but they don’t want to take on mortgages or loans or financial burden for that.”
Data from Redfin supports Arabi’s claim, as 26% of people who are looking to buy a home are planning to move. The areas hit hardest by this trend are expensive metros, such as San Francisco and New York. Arabi added that the National Association of Realtors found people move every 5.3 years, which he said should go down “considerably” considering recent trends from millennial and Gen Z buyers. Zillow reported in 2019 that the number of people between the ages of 25-and-34-years-old that have lived in their home for less than two years rose to 45.3% in 2017 from 33.8% in 1960.
“If you work out the financial aspect of it, there’s probably not a lot of equity that you’re going to be able to build within those two years that will cover the costs for the selling and the cost for buying,” Arabi said. “Ultimately, financially, if you’re making that move, you probably will be in the losing state versus the profiting state. And if that’s the case, you probably would choose to rent versus buy at this point.”
The End Zone of Opportunity
Rising home prices in the singlefamily space are also leading investors to investigate the potential of HUD’s Opportunity Zones. Opportunity Zones offer the opportunity to achieve homeownership, with the intention that prices remain low to help drive economic growth.
The Tax Cuts and Jobs Act created new tax incentives for investments in Opportunity Zones. These cuts were used in an effort to spur economic development and job creation with long-term investment in low-income communities across the nation. Areas designated Opportunity Zones are census tracts determined by state executives to be most in need of private investment. During the State of the Union Address on February 4, President Donald Trump said jobs and investments are “pouring” into roughly 9,000 “previously neglected neighborhoods” due to Opportunity Zones.
“Wealthy people and companies are pouring money into poor neighborhoods or areas that haven’t seen investment in many decades, creating jobs, energy, and excitement,” Trump said. “This is the first time that these deserving communities have seen anything like this.”
Information from Auction.com found that in the Q2 2019 Seller Strategy Report that homes in Opportunity Zones sold at an average price point that was 24% below the average price outside of these zones. However, ATTOM Data Solutions’ Q3 2019 Opportunity Zones Report said that nearly half of Opportunity Zones saw median home prices rise more than the national increase of 8.3% from Q3 2018 to Q3 2019.
“On its face, this is a good sign for homeowners in these zones, as it raises their property values and reflects a continued economic expansion in the residential housing market,” said Josh Stech, CEO of Sundae, a residential marketplace for dated and distressed houses. “It also shows that homebuyers are more open to transitional areas in order to find better value, which helps bring the value of these areas up and evens out the overall market.”
Stech added the incentive of Opportunity Zones is not to restrain homes prices within them, but rather to “better balance the broader market.”
“Naturally, by improving these communities, there will be an increase in demand, which does carry the possibility of raising prices,” Stech said. “In doing so, we can expect some decrease in demand amongst other, overpriced neighborhoods. Homebuyers are ultimately provided with more options at better prices overall.”
ATTOM Data Solutions’ Q3 2019 Opportunity Zones Report said that nearly half of Opportunity Zones saw median home prices rise more than the national increase of 8.3% from Q3 2018 to Q3 2019. Daren Blomquist, VP, Market Economics, Auction.com, said home prices increasing in these areas is evidence that the housing recovery is expanding to lower income neighborhoods.
“Certainly that could be seen as a negative,” Blomquist said. “I see it mostly as a positive, because you’re seeing this economic and housing recovery extend more broadly to neighborhoods that in the past may have been overlooked or left out of these types of recoveries.” Blomquist added that these zones could be witnessing a “latecycle housing boom” and that investors may think twice before committing funds to these areas.
He noted that low-income areas are usually “the first ones to fall” during an economic downturn. “One thing about the opportunity zones is, theoretically, these should help to better insulate these neighborhoods against that more volatile type of pattern that we sometimes see in a typical housing cycle,” Blomquist said. Elizabeth Balce, EVP, Loan Servicing, Carrington Mortgage Services, said rising home prices are a challenge in many cities across the nation, but noted that, in Opportunity Zones, municipalities are still in charge of the development.
“This isn’t necessarily a federally mandated program; it’s a change in the tax code,” Balce said. “So cities can continue to regulate at the local level to encourage, or fast-track approval of projects that most benefit their community.” Balce said that reasons for price could be caused by several factors including, but limited to, job creation, growing incomes, or Opportunity Zones.
She noted that home prices should not be the lone economic indicator, as she referenced a study that found prices of depreciated property and vacant land increasing inside Opportunity Zones, but not all prices in the areas were depreciated. “Ideally that would mean existing home prices have stayed more affordable, and additional housing is being brought back onto the market, or being created from underutilized properties,” Balce said. “But I don’t know that that’s a definitive correlation, but that’s certainly something we can hope to draw from it.”
Martin Muoto, Managing Partner, Sola Impact, is focused on investing in Opportunity Zones in historically neglected areas in Los Angeles—South Central, Watts, and Compton. He said the legislation was passed to drive capital into areas that have been capital starved, many of which has been neglected for three or four decades. “I pushed back fairly strongly on the folks simply throwing stones from glasshouses.
How’s this going to hurt this community? I’ve spent 10 years investing in South L.A. Come down, spend the time. Walk the streets, speak to the residents, and you’ll see that this community desperately could do with improved economic infrastructure,” he said. “The Opportunity Zone is perhaps the most direct way that that economic infrastructure can be built.” Blomquist told MReport that Opportunity Zones may have an indirect impact on those entering the housing market, as it works to lift certain neighborhoods.
“The impact I see with firsttime home buyers is someone who might’ve unfortunately avoided those neighborhoods in the past and said, ‘I don’t want to buy there because the value of my home could actually decrease if I buy.’ They’re considered a little more risky,” Blomquist said. “That potential first-time home buyer may take a second look at properties in these neighborhoods and be willing to buy there and be able to buy because of the lower price points.” Balce said people want to become homebuyers in areas that become economically stabilized.
Conversely, she said Detroit and Memphis, Tennessee, are having people spend more on rent than they would in mortgage payments. Balce added that people in these areas need education about FHA, VA, and other loan programs that could make access easier, in addition to what cities are regulating what gets built—including Opportunity Zones that can focus on increased supply of affordable homes.
Residential Investment Heading into the New Decade
Insight from CoreLogic in 2019 found that, by the end of 2018, the investment rate in the U.S. housing market reached 11.3%— the highest rate since CoreLogic began tracking data in 1999. The investment purchase rate in 2017 was at 11%, an uptick from between 2012–2014 when investor rates reached 10.3% and 10.9%.
While sinking affordability is leading a rise to opportunities for investors, Arabi said “our industry is definitely under attack.” “Historically, we’ve been defragmented to the point that we will become a very easy target for municipal politicians, state government to be able to put in new regulations on the industry,” Arabi said. “Housing is such an integral part of the American Dream. And quite frankly it does offer or persuade the public votes. And that’s why politicians are very excited about introducing something that may get them votes.”
Pintar said you’d “had your head in the sand” if you’re missing the political actions being taken to keep rental affordability in check. Pintar noted that his home state of California recently came out with a new round of rent regulations, where property managers are still allowed to get a 5% annual increase plus the consumer price index.
This role, Pintar says, will ultimately hurt the renting population, especially in a strong market.
Arabi added that it is also not easy to make money in investment. He used the example of introducing a rental inspection fee, which he said the financial effect is “quite sizable.” Arabi said, “Because you take the cost for that fee, multiply it by how many rentals you have in that municipality, then that would be the revenue that the municipality would receive out of it. And as you can see, a $50 or $100 fee could generate millions of dollars depending on the number of rentals within that municipality—millions of dollars of revenue for those municipalities.”
The best way to keep up with changing regulations is to participate in organizations, such as the National Association of Realtors, the National Rental Housing Council, and Five Star, he said. He added that it is vital for property managers to be educated and vote on issues that affect singlefamily rentals in your metro.
“At the end of the day, all of those regulations are going to affect you and you need to make your voice heard,” Arabi said. Pintar noted that his home state of California recently came out with a new round of rent restrictions, where property managers are still allowed to get a 5% annual increase plus the consumer price index.
This role, Pintar says, will ultimately hurt the renting population, especially in a strong market. “You’ve had instances in the past where landlords haven’t done anything to increase the rents, they just wanted to maintain happy tenants. Whereas now they’re saying, ‘Shoot, if I don’t at least ask for my maximum, I’ll never be able to catch up,’” Pintar said.
“You’re going to start seeing a lot more increases on tenancies in homes that they’ve never seen before, and 5% plus consumer price index is still really strong. So it’s definitely an impact, and you wish the government would stay out of private investment, but it’s kind of the rules that we have to play with.” Pintar said that the “continued evolution” of the industry—the buying, holding, and aggregating the property at one time—is still a great strategy.
“But what we’re also seeing is a great opportunity to actually build and create your own inventory through build-to-rent communities, where you’ve got a lot of land. Instead of building out 200 homes for sale, you build out 200 houses for rent and give yourself incredible optionality in the future as the investor, on how to manage that asset in one community, but also provide a really nice product for your customers, the tenants that are choosing to rent, but want to be in that new home community feel,” Pintar said.
Arabi said experience is key and that experience in the investing community is becoming better by the day. He added that more investors are getting access to data to make “rational decisions” with needing to physically be at the property. He said iBuyers are a great example of how access to data is changing the landscape for buying and selling homes.
“At the end of the day, it’s the ability to basically buy right, operate right, and produce the financial results that you planned on when you made your purchasing decisions and access to data, access to good softwares, and good platforms would allow you to be able to match those three bullet points together,” he said.