Demand For Rental Homes Clashes With Those Who Want To Restrict Supply

This week’s Courier Herald column:

Like many components of household budgets, rents have been increasing.  They’re now increasing at increasing rates. 

Data provided by real estate consulting firm CoreLogic this week revealed that year over year rents for single family homes are showing double digit increases, with demand especially strong across the sun belt.  Nationally, rates are up 12.6% year over year.  The Atlanta metro area – the only Georgia region included in their survey – saw a slightly higher bump at 12.8% after increasing just over 7% the year before.

This is good news for home owners.  Rent rates provide a floor for overall home values.  If a homeowner’s needs or ability to make mortgage payments suddenly changes, renters can provide a solution. 

This can be seen as one of the reasons home prices have also been increasing at increasing rates.  The supply of homes on the market for sale has been shrinking.  With mortgage rates still below historic averages and many consumers flush with cash after two years of limited spending, many new homes are seeing bidding wars and sales above listing prices.

This isn’t such good news if you’re a renter.  Housing affordability has been a growing issue, especially among those in lower paying and entry level jobs. 

For renters, their income dedicated to housing is an expense.  For homeowners, the same payments represent an investment.

And yet, there is increasing demand for rental housing, especially in the single family home market.  Millennials – now ranging in age from 26 to 41 – are now the prime generation for forming households.  They tend to prefer flexibility over making long term commitments.  They’re also willing to trade off the opportunity to build equity in exchange for avoiding the headaches of maintenance home ownership requires.

The result is that publicly traded companies and private equity firms are now buying and/or building entire residential developments for “build to rent” communities.  Rising rents indicate the demand is there.  Like so many other components contributing to inflation, supply is naturally constrained.

This practice is especially strong in the suburbs and exurbs surrounding Atlanta.  With very little single family housing supply created in the decade after the great financial crisis, builders and developers are trying to meet what now appears to be an unlimited demand. 

Those who have attempted to purchase a home in the last year are likely familiar that cash offers are preferred to those with mortgages, and some using government assisted mortgage programs are put at the bottom of the competing offer list because of the additional hoops sellers must jump through to complete the sale.  Thus, logic would follow that if a real estate firm with Wall Street deep pockets shows up and the front of the line and makes an offer to buy the entire subdivision, they’re going to get the seller’s attention.

Local governments have noticed the trend, and some are balking.  Various counties and cities are attempting to restrict or prohibit “build to rent” developments, with some going so far as envisioning a ban on single family rentals entirely. 

Consider it a very southern version of rent control.  If the market is deprived of rental units to meet demand, then the prices of existing rentals will go up.  All while many of these same local officials will trumpet their dedication to the “free market”. 

When times are good – and now for home owners they are very, very good – it’s hard to demonstrate that policies which favor home owners over renters are suboptimal.  It’s when times are bad – and the housing market has proven quite cyclical over my half century plus of experience that has included being a homebuilder, developer, and Realtor – renters often pick up the slack.

Local governments need to tread very carefully when they start deciding who is allowed to own homes, and what homeowners are allowed to do with their own property.  Short term thinking has longer term consequences. 

Exclusionary zoning tends to favor homes owned by upper income, higher tax paying individuals.  It also tends to push out those just marrying and having their first kids.  It takes out people needed to work many of the public service jobs that a community needs.  Many of these folks start out renting.  Some become homeowners, some do not.

It just seems odd that some governments want a litmus test of who owns a structure as to whether a home can be rented, while some going so far as to try to further restrict rentals in some areas entirely.  It’s almost like it isn’t about whose name is on the deed, but instead selecting who can and who can’t move in next door.