Shift to rentals eats into supply of available starter homes
The growing number of young households considering buying a home may be wondering where all the starter homes have gone.
With labor markets picking up, young adults are finding jobs, beginning careers, and some are hoping to qualify for a mortgage. Unfortunately, in many markets, prospective buyers may find few small “starter” homes they can afford.
It’s not in their imagination, according to a new Housing Insights analysis from Fannie Mae’s Economic & Strategic Research Group (ESR). The study looks at supply-side challenges to the ongoing housing recovery and finds that many single-family detached units of a size typically purchased by young, first-time homebuyers are serving as rental properties.
“Tight mortgage credit is often cited as an obstacle, but in recent months attention has shifted to a low inventory of for-sale starter homes as an impediment to the return of the first-time buyer,” writes Patrick Simmons, ESR’s director of strategic planning.
The study looks at supply-side challenges to the ongoing housing recovery and concludes that the rental market has contributed to the supply crunch, he says.
ESR found that the stock of owner-occupied starter homes declined by more than 1 million units between 2005 (roughly the peak of the housing boom) and 2013 (the most recent year for which data is available).
Over the same period, the inventory of renter-occupied starter homes rose by approximately 2 million units. Starter homes accounted for two-thirds of the growth in all single-family detached rentals during the period.
The study defines starter homes as single-family detached units with less than 2,000 square feet of floor area.
A Help and a Hindrance
At least in part, the shift to rentals reflects “much-needed” market adjustments in response to imbalances stemming from the credit bubble and homeownership boom of the early 2000s, according to the ESR report.
“As single-family investors swooped into the market in the wake of the housing bust and converted homes from owner- to renter-occupancy, they helped to stabilize prices, remove excess vacant units from the market, and absorb a bloated inventory of foreclosed homes,” Simmons says.
“They have also contributed to the starter-home shortage that now appears to be slowing the return of first-time buyers to the housing market.”
Unfortunately, builders haven’t been doing much to alleviate the situation. The construction of modestly priced housing has been “subdued” in recent years, according to the study.
In 2005, home builders completed about 650,000 single-family detached and attached homes of less than 2,000 square feet. By 2011, building of such homes had plummeted to less than 200,000 units annually. So far, there have been few signs of a rebound.
Starter homes declined from a 40 percent share of new single-family construction in 2005 to 32 percent in 2015.
So young families who want to enter the homeownership market can at least partially blame the shift to rentals for today’s slim pickings. And, ESR’s research suggests, the tighter supply has in turn fueled rapid price gains in the lower tiers of the for-sale market, raising affordability concerns for first-timers.
As more young families pursue homeownership, the hope is that future market adjustments might shift some of the single-family rental inventory back to owner occupancy. The study notes that some institutional investors in single-family rentals have launched initiatives that enable tenants to purchase their homes.
However, more effort might be needed to expand the starter home supply and help potential first-time buyers overcome the “substantial” obstacles they face.
This includes expanding rent-to-own financing options and reviewing development regulations, impact fees, and construction delays that are possibly hindering construction of entry-level homes, the researchers say.
Estimates, forecasts, and other views expressed in this article should not be construed as indicating Fannie Mae’s expected results, are based on a number of assumptions, and may change without notice. How this information affects Fannie Mae will depend on many factors. Neither Fannie Mae nor its Economic & Strategic Research (ESR) group guarantees that the information in this article is accurate, current, or suitable for any particular purpose. Changes in the assumptions or underlying information could produce materially different results. The ESR group’s views expressed in this article speak only as of the date indicated and do not necessarily represent the views of Fannie Mae or its management.