December 1, 2022

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‘Build to rent’ homes offer a new option, although critics say it fuels inequality

'Build to rent' homes offer a new option, although critics say it fuels inequality

ROUND ROCK, TX – Adam and Beneath Gaston arrived in this Austin suburb in June with a toddler, a dog and enough money for a down payment. But within days They have canceled their plans to buy a home, deterred by rising home prices and rising mortgage rates. Instead, they pay $4,000 per month to rent a three-story home in a new project aimed squarely at tenants.

With the housing market deteriorating, families across the country are avoiding home ownership and instead switching to new homes in rental-only projects like the home the Gastons landed in. When complete, Oaks on Chisholm Trail will feature 113 self-contained homes, each with a kitchen island, two-car garage, and a small patch of lawn—all for rent exclusively.

It’s one of thousands of “build for rent” projects popping up across the country, touted as an achievable route to single-family homes and front yards at a time when home ownership is becoming increasingly elusive. Developers are expected to add 105,000 homes in these communities this year, and 50 percent more by 2025, according to real estate advisory Hunter Housing Economics.

Corporate landlords are devouring the American suburbs. These homeowners are resisting.

The build-for-rent phenomenon took off before the recent slowdown in existing home sales, which have been down for seven straight months.

But decades of high mortgage rates are making homes expensive – something that is only expected to increase demand for rents. Today’s 20-30 year olds were far more likely to rent than generations before them — thanks to a combination of economic and social factors, including the aftermath of the Great Recession, growing student loan debt, and the desire for more flexible living arrangements.

Mortgage rates reached 6.7 percent as the housing market continued to slow

“We looked at the purchase a few times and just couldn’t swallow it,” said Adam, 34, who owns a dog walking and breeding business. “We fit the demographics of people who, five years ago, would have bought a huge house in the suburbs. But now the prices are crazy, and we are making different decisions.”

New construction of tens of thousands of rental homes could help rebalance the broader housing market, which has been stuck in a construction crisis for years. According to some statistics, the US economy is short of 5 million single-family homes.

But critics, including local housing economists, say build-to-let arrangements are exacerbating long-running inequalities by substituting entry-level homes for rents that make home ownership more difficult.

Buying a home has always been one of the most straightforward and reliable ways to build wealth. But when renters are faced with a constant rise in rents, it becomes very difficult to provide a down payment to buy a home. Data shows that renters spend more of their income on housing than homeowners do, in part because rents tend to rise each year.

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“We are replacing the supply of available start-up homes with more rental housing,” said James Gaines, an economist at Texas A&M University’s Center for Real Estate Research. “It changes the economic dynamics of buying a home at the entry level and has a real impact on the kind of homes people can get and how much they can get for it.”

Rent Rising: Why Prices Only Rise

Meanwhile, many of the country’s largest home builders, including Toll Brothers, Dr. It is estimated that rental construction projects make up about 10 percent of new homes in the country.

“Home builders weren’t doing a good job producing affordable homes for young families before that,” Hunter said. “Millennials are coming in with dogs, they have kids, they work from home and they say, ‘I need to move from my downtown apartment to a single-family home because I want a yard and parks nearby. “But they can’t buy.”

At least six rental built communities are already within a 20-mile radius Austin, with 11 others in progress, Totaling over 2,500 new homes. Most of the projects are located in suburbs such as Round Rock, home to Dell’s headquarters, where middle-class families usually venture into buying their first homes.

In interviews with nearly a dozen residents who rented newly built homes in central Texas, nearly all said they hoped to buy once they saved up enough. Many of them were in their twenties and thirties, and had recently been engaged or married. Some had young children. Almost all of them have dogs.

Justin Whitted, 37, who moved into a two-bedroom home in Urbana at Goodnight Ranch, said early in the pandemic. Although his rent has since gone up 20 percent to $2,200 a month, he said he hopes to stay until he saves up a down payment.

Rents are going up everywhere. See how much prices go up in your area.

“It was home-made without the hassle of a long-term commitment,” he said.

This was also the appeal of the Gastons, who had moved to Texas from New York, where $4,000 monthly rents are more common than in Texas.

Like thousands of others, Al Gaston was seduced Early in the pandemic By the promise of warm weather, ample space, and low costs. The influx of new residents has raised rents and home prices in the Austin area by at least 30 percent in two years. Median home prices jumped from $355,000 to Almost $500,000According to the Austin Board of Realtors. Meanwhile, average rents have risen from around $1,780 to $2,343 In the month, Redfin data appears.

Our accountant, our financial advisor, everyone, kept asking, ‘Why don’t you guys buy a house? Adam Gaston said. “For the generation above us, success equaled owning a home. But for our generation, that is no longer the case.”

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Developers began building entire subdivisions of rental homes about a decade ago, in the wake of the Great Recession. They found that building large areas of 300 or 400 rental homes was more efficient and profitable than buying investment homes, one at a time.

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For years, a few rental neighborhoods—most concentrated in Arizona, Texas, and other states along the South—targeted people who didn’t have the cash or credit score to buy a home, but still wanted the feel of suburban living.

With the increase in cases of COVID-19 virusAnd the Suddenly, young professionals all over the country wanted to trade in their city apartments for rent in the suburbs. Give priority A work-from-home space and yards for their parched dogs.

Homebuilders and investors were ready, had a lot of money and had cheap financing. By renting homes rather than selling them, Gaines, an economist at Texas A&M, said they could take advantage of high rental growth while also holding on to the rapidly rising land under their homes. The result was nearly 800 new rentable homes in the Austin area between 2020 and 2022, a 134 percent increase over pre-pandemic building rates, according to the national apartment search site RentCafe.

“All of a sudden, every time you see a few hundred acres on the road, instead of it being available for people to buy, that land is being converted into homes for rent,” Gaines said. “We don’t really know what their exit strategy is or how long they will stay here. Are these going to be neighborhood rentals forever? Will they at some point start selling properties? There are a number of possibilities but there is no doubt that the end goal is: how much How much money can I earn?”

Inflation makes homelessness worse

With the housing market coming to a standstill, some home builders and investors are beginning to convert entire neighborhoods of new real estate into rentals, as has been the case with the Gastons development. Some of the homes there had already entered the market last year when the private equity firm from California collected all over 100 lots and started putting them up for rent.

“We still get people coming in every week asking if they’re for sale,” said BriAnn Boruszewski, rental consultant at Oaks on Chisholm Trail. “And we have to say, ‘No, sorry, for rent only.’ It’s a rental generation now.”

Housing economists say this shift toward rents puts potential home buyers at a disadvantage. Housing and poverty policy experts have long viewed home ownership as a one-way ticket for the middle class, and this is especially true at a time when home prices are rising. Rents and home prices have risen sharply during the pandemic. But while homeowners have benefited from lower interest rates and rising home values, renters have not seen such gains.

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“Rent payments do not go into building equity, and they are a significant part of the wealth of most American households,” said Daniel Bang, a research assistant at the Urban Institute’s Center for Housing Finance Policy. “Home ownership is a means, a path by which a set of privileges can be acquired…it has always been so.”

‘We’re all scared’: Massive rent increases hit mobile homes

Despite this, developers and investors say they are simply filling the need for more rental housing. NexMetro Communities, a Phoenix-based homebuilder, is expanding nationwide, building thousands of rental homes in suburbs near Dallas, Denver, Atlanta, and Tampa. Two communities under construction north of Austin will contain about 200 homes each, as well as pools and dog parks to cater to a mix of millennials and baby boomers.

The company usually sticks to its projects and operates them for the long term, although it sometimes sells entire communities of 100 to 200 homes to REITs and other investors who then rent them out.

“There is an unmistakable allure and popularity for this type of hybrid housing,” said Jack Petrolacis, Executive Vice President at NexMetro. “Building for rent does not replace home ownership. It is another rental option that offers people a more attractive option in the meantime before they buy a home.”

Earlier this year, Tim Vanzel, 48, moved into a rental subdivision in Georgetown, Texas, about 30 miles north of Austin, with his wife and their deaf rescue dog, Soda. They pay $2,600 for a four-bedroom home and ultimately save up to buy a place of their own.

In the meantime, he said he’d love to own a detached home without having to deal with the hassles of owning a home, like mowing the lawn or changing the air filters.

“When the light bulb goes out, I don’t have to replace it,” he said. “If I have to wait five years – or realistically seven years – to set aside enough for a down payment, at least we can live comfortably in a place that looks like Pleasantville.”

VanZile, who works as an inventory manager for a car rental company, said he hopes to live in his rental home for at least five years — he and his wife are already adding a collection and making other improvements. But he worries, there is a possibility that it will be priced before then.

“There’s no doubt that our rent will go up at some point, so who knows how long we’ll be able to carry this on,” he said. “Then what should I do? Move further?”

Rachel Siegel contributed to this report.