The overall construction rate of new single-family homes in the US has slowed in the past few months, but one particular kind of construction—single-family homes built not for sale, but for rent—is going gangbusters.
This construction model, called “single-family-built-for-rent,” has been a small but growing part of the residential construction sector for the past decade, and now they’re being put up in record numbers. In the third quarter of 2021, construction started on 16,000 single-family homes for rent, more than any other quarter on record, according to the Census Bureau’s quarterly report (pdf) of new home construction.
Housing economist Robert Dietz, who analyzed this data for the National Home Builders Association, says that while this sector is still less than 5% of the overall single-family construction market, this recent increase is part of a response to a housing market that has put homeownership out of reach for many people.
House prices across the board have surged more than 20% in the past year, excluding many millennial Americans starting families and looking to move to the suburbs. The median price of a home is now $404,700, and the median monthly mortgage payment is $1,600. These new rental homes offer a way to rent the American dream even as ownership moves further out of reach for more people. “Not everyone can afford the down payment to purchase a home, so that opens up opportunities for the rental sector,” says Dietz. “In our consumer data we’re seeing a growing sense of frustration about the lack of inventory and affordability.”
Houses built for the express purpose of renting tend to differ from traditional single-family homes in their design and style. They’re slightly smaller, with fewer bedrooms than a typical suburban home, and closer together on smaller lots of land. Often, they’re designed as townhouses. The houses are owned and managed either directly by the builder or are sold to institutional investors, like Starwood Capital and Blackstone, which earlier this year added 17,000 homes to its portfolio through the acquisition of another home rental company.
When the built-for-rent sector began to take off after the US Great Recession, the basic appeal was to offer people all the benefits of suburban, single-family living without the cost and responsibilities of homeownership. The pandemic only deepened these incentives, as city-dwellers sought more space and bigger homes that allowed for remote work.
But renting to access the benefits of single-family homes can be a catch-22; For people who aren’t able to afford to buy a single-family home, renting one shuts them out of building equity in the property and thereby building wealth. Over time, this can impact the wealth-building prospects for a generation. Millennials, the largest generation of Americans, currently has the lowest rate of homeownership, at 42%, compared to 48% of Gen X-ers owning a home, and 51% of boomers.
Most built-for-rent single-family homes are being built are in southern states like Texas and Georgia, where land for development is relatively affordable, and there is strong demand for single-family homes. These homes are often built near major cities like Houston or Dallas, but tend to be situated in less-dense exurbs outside of the metro area.
Dietz expects this sector to continue to grow, in part because it’s going to remain expensive to buy a home. “As mortgage interest rates rise over the next two years, we’re going to see ongoing declines in housing affordability,” he says, “which means demand on the rental side is going to continue to increase.”