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Tags: covid | nar | rentals

Romer: Access to Homes Not on Par With Demand

danger high fees ahead on housing
"Danger High Fees" (Gary McCoy/caglecartoons.com/The Cagle Post/Syndicate/Cartoons)

By    |   Monday, 28 March 2022 03:14 PM EDT

The residential housing market remains in the midst of a perfect storm where there is record low inventory and extremely low mortgage interest rates.

This storm has obviously led to increased homes prices throughout the United States. According to the National Association of Realtors ("NAR"), average home sale prices increased 15.9% in January of 2022 as compared to the prior year.

The NAR also estimates the national housing shortage to be approximately 6.8 million homes. This is a textbook example supply and demand economics at work.

As the housing shortage and pricing increases continue, one has to wonder who is acquiring all these residential properties.

Prospective homebuyers will be surprised to learn that they are competing with some of the largest institutional investors in the world.

According to Redfin, a staggering 18.4% of all single-family homes were purchased by institutional investors in 4th Quarter of 2021.

That is roughly one out of every five residential transactions.

Why are the likes of Blackstone and Colony Capital buying so many residential homes ?

The answer is a simple — it’s quite profitable.

During the pandemic, interest in single-family rentals has drastically increased and the investors have taken notice.

Many of these institutional investors had historically focused heavily on multifamily properties. However, the multifamily market is no longer the only premier game in town.

Given the drastic increase in demand for single-family rentals, many investors had to change course and consider single-family properties as well.

From a business standpoint, they would be foolish not to.

By most accounts, the single-family rental market had its best year ever in 2021.

Is this a pandemic-inspired fad that will subside over time or is the future?

One has to look no further than the pandemic itself to find the root cause of the increased demand in single-family rentals.

During these last few years, the residential market has experienced record movement and a mind-blowing number of transactions.

Many individuals and families have moved from the cities to the suburbs or from one state to another.

All of this movement has increased home prices and worsened the housing shortage in this country. Here is a quick analysis of factors at play here:

Home Prices Pushing Individuals to Rentals

For starters, continued home sale price increases are pushing many prospective homebuyers out of the market.

Not everyone has the liquidity necessary to purchase a home (even with a mortgage).

A majority of residential lenders require a down payment of 25% and a post-closing debt-to-income ratio of 35%.

That's a very tough hill to climb for many and, as a result, single-family rentals have become an attractive back-up plan.

Economic or Job Uncertainty

Although the economy continues to recover, for many businesses the recovery has been slow and painful.

For some, the recovery has been non-existent as they were forced to close their business.

Fear related to job or economic uncertainty is real for way too many. Confidence (or lack thereof) related to the economy or one’s own job security absolutely impacts the decision whether to buy or rent.

Renting can be seen as the more conservative option in challenging times.

How Long Can I Work from Home ?

Let’s be honest — this isn’t about COVID-19 anymore.

The pandemic normalized the concept of remote working which has changed the game for many and has become a residential market disruptor.

Renting homes in suburban areas has become quite popular for many remote workers.

But, what will happen when their employers require a return to the office?

The concept might not be as popular when a rigorous commute is involved. Renting until the dust settles may just be the smart play in short term.

These are just a few examples of the factors which are leaving many either unable to afford to purchase or unable to make the commitment at this time.

Simply put, demand for residential homes has skyrocketed but an average individual’s ability to actually make that dream a reality has not. Access to homes is absolutely not on par with demand for homes.

With heavyweight institutional investors as competition, this won’t be changing anytime soon. Single-family rentals will continue to be a hot commodity in 2022.

Michael Romer is Managing Partner at Romer Debbas, LLP, a New York City-based law firm uniquely focused on commercial and residential real estate transactions, development projects, and litigation. The firm’s practice also extends to include Bankruptcy, Corporate and Business Law, Immigration, Litigation, Taxation, Trusts and Estates.

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Demand for residential homes has skyrocketed but an average individual’s ability to actually make that dream a reality has not. Access to homes is absolutely not on par with demand for homes.
covid, nar, rentals
Monday, 28 March 2022 03:14 PM
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