Single-Family Home Rental: A Sign of the Economic Times

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October 11, 2015; Columbus Dispatch

The American Dream of the single-family homeowner—nuclear family, a mortgage, and maybe a white picket fence—is being turned on its head by two consequences of the Great Recession: lack of demand for home purchases and a glut of unoccupied single-family houses. On the demand side are former homeowners who are unable or unwilling to return to homeownership and Millennial households which might have been first-time homebuyers except for student debt burdens, stagnant wage growth, or a taste for a more urban lifestyle. At the same time, there’s the supply of millions of unsold single-family houses that are a drag on their communities. These two forces collide in the form of Single Family Rental (SFR) homes—a new mashup of the American Dream for the 21st Century.

The Columbus Dispatch captures snapshots of this new American Dream: “The crash pushed tens of thousands of central Ohioans from their homes, which investors gobbled up to cater to an increase in renters. In the past four years, more than 20,000 central Ohio homes have been turned into rentals, according to the Census Bureau’s American Community Survey.”

This is not just an Ohio phenomenon. Using the same dataset, the Joint Center for Housing Studies (JCHS) reports that “While new construction of rental units has picked up in response to this demand, the majority of it has been served by conversions of existing units from owner- to renter-occupied, mostly from the single-family housing stock. As a result, since 2006 the number of single-family detached homes occupied by renters has increased by a third, from 9 million to over 12 million…and now accounts for 29 percent of all rental housing.”

The glut of unsold single-family houses in Ohio comes in a variety of forms with funny names. “Underwater” houses occur where the owner owes more on the mortgage than the value of the house. Typically, an “underwater” owner is trying to hold on or refinance, but may have moved and rented to another household to help cover costs. Some reluctant landlords have turned to professional management companies to keep some cash flowing. “Zombie” properties are vacant eyesores that have been abandoned by owners. Eligible for foreclosure, these properties are too expensive to maintain with no prospect of sale or rental, and so they become abandoned. Zombies may have delinquent mortgages or property tax liens or both, but the debt holder has not proceeded to foreclosure. Last spring, a different story in the Dispatch expressed the hope that the home sales business had revived enough that banks were moving to take possession of zombie houses, but that blush of optimism seems not to have been consummated in actual sales. Alas, zombie houses also present a business opportunity for scam artists, who informally take possession of the house (by breaking in), then advertise and take deposits and first month’s rent before slipping off into the night. Ohio’s attorney general warns home seekers to beware.

Then, there are “ghost” properties, which a third Dispatch article explains ghosts this way: “The Chittenden property is considered a ‘ghost house,’ a structure that remains in the name of someone who has died. The houses are often vacant, blighted and a pain for family members left holding the bag.” Because many houses aren’t marketable, they remain as a burden on heirs and successors, some of whom are already burdened by the houses they are living in. If relatives fail to pay close attention, these “ghosts” may be targets for either scammers or squatters.

In the photo that illustrates the Dispatch story on SFR housing, a neighbor leans against a “FOR RENT” sign posted by American Homes 4 Rent (AH4R), a national SFR landlord. AH4R was recently profiled in connection with single-family home purchases in the Portland, Oregon area. Like its counterparts, the business model for AH4R involves buying distressed houses and bundling them into a financial instrument that is sold to investors and supported by anticipated rents from the properties. AH4R provides management and maintenance services, using local contractors. While there’s a lot of anecdotal evidence that SFR investors are slow to repair, shift maintenance costs to tenants and push up rents, there is no hard data about this new form of rental owner.

Nationally, there has been pushback against SFR landlords. Right to the City, a relatively new nonprofit advocacy group, frequently calls for mass action against SFR landlords. Just two weeks ago, Senator Elizabeth Warren (D-MA) called on the U.S. Department of Housing and Urban Development (HUD) and the Federal Housing Finance Agency (FHFA) to curtail sales of delinquent mortgages to for-profit investors.

The Dispatch article about SFR housing touches on two elements that worry community members: reduced maintenance and “new faces in old places.” There’s a perception that property maintenance declines as resident homeowners are replaced by absentee landlords. There’s also a folk perception that tenants are not as conscientious about upkeep as resident owners. The Dispatch offers balanced opinions on this concern. The concern about new faces includes a perception of more rapid change as 30-year mortgages convert to one-year leases. Not mentioned in the article is an underlying concern about the arrival of racial and ethnic minorities into formerly more homogeneous areas. The JCHS study cited above notes that the demographics of SFR are more like multifamily rental than they are like single-family homeownership. That is to say, more racially diverse.

Still open to question is whether home sales will ever rebound to pre-Recession levels and halt the SFR era. It seems like the basic conditions of stagnant wages, burdensome student debt, and higher borrowing standards for mortgages will continue to keep middle-class households in rental housing. Interestingly, some argue that the move away from homeownership started before the Great Recession, as Millennials entered an employment environment that increasingly rewarded geographic mobility instead of residential stability. If the balance between rental and ownership continues to equalize, one may expect to see the “new renters” seek greater legal parity with property owners. The new American Dream may be a rental home.—Spencer Wells