Garret Johnson set off on what he expected to be a pretty simple trip to sell his house last March. But after a few months with no buyer found, he changed tactics. After one too many rental applicants no-showing him, he felt discouraged and frustrated and made a change. Johnson no longer anticipates his sale will happen within a few months’ time. This comes at a time when more and more homeowners find themselves at wits end in this new challenging housing market.
This is a stark difference from the last year, where inventory levels of homes for sale increased almost every month, causing longer times on the market. Home sellers don’t want to blink and cut prices. Consequently, too many properties sit on the market for an inordinate amount of time. In many eastern markets, inventory growth has accelerated past 20%. A large part of this increase can be attributed to former owner-occupants, like Johnson, who have gone from home sellers to property owners.
According to Jesus Leal Trujillo, homeowners in such situations face three primary options: “When these home sellers cannot find buyers, they face three choices: delist and wait, cut price to find market clearing level, or convert to rental. The last option creates what Parcl Labs terms ‘accidental landlords’: Owners who enter the single-family rental market not by design, but by necessity.
In Johnson’s case, he was flooded with offers to rent his home within hours of posting it on the site. Despite the fact that his rental income can’t even pay his mortgage, he stood up to recast his loan. This allowed him to pay down more of his equity in the property and lighten his financial load. “I’ve gotten to be creative, and hopefully the goal is, in the next few years, to start to turn a profit on the month-to-month basis of the rent versus mortgage,” Johnson stated.
Real estate market dynamics are flipping real estate upside down. For example, institutional landlords like Invitation Homes (INVH) and American Homes 4 Rent (AMH) are quoting renewal rates between 4% and 5%. They have a phenomenal 75% portfolio wide retention rate. These investors own more than 50,000 homes each, and their ownership is highly concentrated geographically. Large landlords are moving in a new direction. Now, instead of competing against smaller investors and traditional homebuyers for resale properties, they’re focusing on build-to-rent ventures.
Rick Sharga of ATTOM chimed in with the cyclical character of what we’re seeing. He said we started to see the same patterns play out in 2022, when mortgage rates doubled. “We saw something like this in 2022 after mortgage rates doubled: A huge uptick in the number of people who owned one property besides their primary residence,” Sharga explained.
Reports have indicated that unprecedented rent hikes will be limited as the rental market changes. Haendel St. Juste indicated that while large portfolio owners have been able to maintain their rental rates effectively, smaller landlords may not enjoy similar advantages. “You’re not going to see big reductions in rent, but maybe you won’t be able to get 4% or 5% increases on your rent. Perhaps that’s only 1% to 2% on their end in certain instances,” St. Juste stated.
The twin effects of a booming supply and a worrying economy have created a perfect storm, making conditions difficult for sellers and renters alike. As a result, many sellers are catching up where it’s now or never to pivot and prevent getting left behind to meet the risk of greater losses. St. Juste underscored the biggest worry. He cautioned that the soft selling season could result in greater supply this fall and next spring, potentially limiting rental growth prospects for next year.