As mortgage rates rise, more people choose to rent single-family homes

In response, major builders and developers are entering the business, once dominated by mom and dad outfits

When Ronald Granville, a former law enforcement officer in Philadelphia, was offered a new job in North Carolina this summer, he and his wife, Fiona Granville, jumped at the chance to move their family. They packed up the van and took their two sons on a road trip looking for a place to live.
The couple dreamed of having their own house and establishing roots. But after calculating the cost of a 30-year fixed-rate mortgage on a three-bedroom home in the local market, they instead went with a new single-family rental community in Brentwood managed by American Homes 4 Rent AMH 0.90%, just minutes from Lake Norman, a place their favorite vacation.
"We did the math and found that the cost of a mortgage, home insurance and taxes will be $1,500 more per month than the cost of renting a house," says the 42-year-old, whose monthly rent is now $2,200 per month. "We decided to wait until the mortgage interest rate drops before buying a house. It's just not economical at the moment."
Increasingly, American consumers facing inflation and high home prices are hitting the pause button on home buying. The average 30-year fixed mortgage rate is now 6.61%, more than double what it was in October 2021, according to housing finance agency Freddie Mac. As a result, Single Family Home Rentals, or SFRs, are now a hot area of ​​the real estate market.
We are in the midst of a housing affordability crisis and people are in shock," says Gary Berman, CEO of Tricon Residential TCN 1.37%, a large developer, builder and operator of single-family homes for rent across the US. and Canada.
The trend made consumers take a closer look at whether renting a single-family apartment today is more economical than owning it. Nationally, it cost $888 a month more to buy an entry-level single-family home than to rent it, according to September data from John Burns Real Estate Consulting. A 30-year fixed mortgage with 5% down (including principal, interest, taxes, insurance and maintenance) on such a home cost $3,058 per month, while the median rent for such a single-family home was $2,170, based on John's research Bern. The company weighed 99 US housing markets to determine the median mortgage payment versus the median rent payment.
According to the National Association of Home Builders, the $4.4 trillion SFR market is one of the fastest growing sectors in real estate. "Today, single-family homes built for rent make up 11% of all construction of single-family homes in the housing market, compared to the 3% market share that was typical in recent decades," says Robert Dietz, senior vice president and chief economist at the National Association of Home Builders. "The sector's market share is on the rise and should rise to 15% in the coming quarters."
Other factors are driving the trend as well. Some consumers face more challenges when trying to get a mortgage. The banks tightened the credit requirements to prevent loan defaults, which makes it difficult to get a loan. For others, the desire for a more transient and hassle-free lifestyle has made home ownership less appealing. This is especially true for remote workers who are mobile and can live and work wherever they can get the best quality of life.
Cost of ownership versus renting
Homeownership premium for starter single-family homes, or how much more expensive or not to own compared to renting, over time
Once dominated by mom and dad developers, the SFR market is now a thriving business for major real estate builders and developers, including Invitational Homes, American Homes 4 Rent, Tricon Residential and AHV Communities.
SFR is "the darling of real estate," says Mark Wolf, CEO of AHV Communities, a company with more than $1.6 billion of single-family rental homes under management and development in six states including Colorado, Texas and Tennessee.
That's despite rents on single-family homes rising 10.2 percent year-on-year through September due to inflation, according to the CoreLogic Single-Family Rent Index. "That pushed the median rental cost of a three-bedroom detached home to $1,900 a month," says Molly Bozel, CoreLogic's chief economist. "In contrast", she notes, "mortgage payments on these types of houses have increased by 50% since January".
Smart homes
Communities are especially emerging in the Sun Belt. The units typically include three-bedroom, two-bathroom homes, a family room, a large, fenced-in yard, and a two-car garage. Besides on-site home maintenance, they offer a host of services – from 24-hour swimming pools and fitness centers to dog parks, walking trails and EV charging stations.
Some new SFR communities are designed for high-end customers. For example, the townhomes at Farm Haus, an SFR community in northwest San Antonio, are all smart homes where residents can control their heat, air conditioning, appliances, locks and garage doors using apps on their mobile phones. The units come with designer kitchens, wooden floors and 2 and a half bathrooms.
Emily Jewell, a 25-year-old bartender and makeup artist in San Antonio, says she and her boyfriend, Danny Press, were turned down for a mortgage for a starter home. "We have a high credit rating but most of our income comes from tips and side gigs that are not reflected on our W-2 forms," ​​she says. "Loan officers were not comfortable approving our application."
Now, for $2,150 a month in rent, they live in a new three-bedroom farmhouse. Ms. Jewell says she likes the perks that come with her community, such as use of the clubhouse where she plans to hold her daughter Santana's first birthday party. "Now I'm spoiled," she says. "I don't want to downgrade when I decide to buy a house."
Joe and Stella Watson of Starr, Idaho, feel the same way. The Watsons just moved with their three children from Sherwood, Ore., into an upscale five-bedroom home in the SFR community managed by American Homes 4 Rent. "The community is full of lots of young families and empty-nesters from all over the country and it has a lot of cool things that the kids like," says Mr. Watson, 40, who works as a corporate information consultant. "We ended up buying a house near Boise," he says. "But for now, we prefer to invest in commodities and high-interest savings accounts until the dust settles in the housing market."

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