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Why More Single-Family Homes Are Becoming Rentals

A homeowner's equity position is one of the many factors that drive property transitions between owner-occupied and rental status, according to a study from the Mortgage Bankers Association's Research Institute for Housing America.

Between 2000 and 2014, 6.5% of homes built before 2000 and 10.3% of homes built in the 1990s went from owner-occupied to rental status, RIHA found in a new study authored by Syracuse University professor Stuart Rosenthal. On average, roughly 2% of the housing stock makes that transition over a decade.

Rosenthal examined different factors that contribute to the transitions between owner-occupied and rental status. One major factor that he found contributed to more homes becoming rental properties was their equity status.

"Underwater homes are notably more likely to transition into the rental sector, possibly because of reduced incentives to maintain the home and related decay," Rosenthal wrote in the report released Monday. Owner-occupied homes where the combined loan to value ratio is between 100% and 120% are between one and two percentage points more likely to become rentals, while homes that have a CLTV above 120% are between six and eight percentage points more likely to make this change.

The share of single-family homes in the country's rental housing inventory was 36.13% in 2014, about 5% higher than in 2000, according to an NMN analysis of Census Bureau data. Meanwhile, the share of single-family homes in the owner-occupied inventory remained relatively unchanged.

Certain factors will prevent or incentive these transitions, though. For starters, if a viable rental market does not exist for the home, it likely won't shift from its owner-occupied status. The study also found that certain neighborhood or structural attributes, such as a waterfront location or being a detached property, will make it less likely that a property will exit owner-occupied status.

The study further teased out long- and short-term trends that guide these transitions. In the long run, age-related depreciation makes it more likely that a home will become a rental property unless structural or neighborhood attributes like those mentioned before come into play.

And in the short term, housing prices will have a big influence on an owner's decision to reside in their property or rent it out.

"For certain types of homes rising house prices encourage transitions into the owner-occupied sector," Rosenthal wrote, noting that higher home prices did not cause transitions into the rental market based on his research. And rising prices seem to affect new home construction, Rosenthal added.

Falling prices tend to predicate short-term swings toward the rental market, and these shifts often reverse themselves as prices go back up. Consequently, Rosenthal's research indicated that the large volume of homes that moved from owner- to renter-occupied following the financial crisis could continue to affect construction.

"Movement of housing stock back to owner-occupancy status…has the potential to undercut demand for new construction since most home building occurs in the owner-occupied sector," Rosenthal wrote. He also noted that the drop in the homeownership rate to a low of 63% in the second quarter of 2016 "suggests that a large buffer stock of potential owner-occupied homes may now sit in the rental segment of the market."

"This may help to explain why new home construction in 2016 remains far below previous levels even though home prices at the national level have regained their 2006 peak," he said, cautioning that this is a topic that requires further research.

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Comments (1)
Not once do you mention the enormously profitable business of snapping up foreclosed single family properties and offering REITS on rental business. It paid Wall Street to force foreclosures. Sick. This country is sick.

I suggest you read Institutional Investors Continue to Buy Single Family Homes, Real Estate Investor, May 2016.
Posted by SusanInFlorida | Wednesday, February 08 2017 at 10:54AM ET
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