\n<\/p>\n
Last year might best be described as a risk-prone atmosphere for the single-family rental sector and the related fix-and-flip market.<\/p>\n
The risky operating environment has been marked by volatile, high interest rates (with 30-year fixed rates now hovering around 7%), high financing costs and moderating rental rates as an influx of multifamily rental properties continues to come online across the country. <\/p>\n
Still, despite the gloomy news of late for SFR and fix-and-flip investors, some industry experts see better fortunes ahead in 2024 for both sectors.<\/p>\n
\u201cWe didn’t call it a bear market, but we did call it a lack of liquidity, which I think is more accurate,\u201d said L.D. Salmanson, CEO of Cherre<\/strong>, a data integration and insights platform serving the real estate market, including institutional owners of single-family rental (SFR) properties.<\/p>\n \u201cThat started in Q4 of 2022, so it’s been about six quarters at this point, and we predicted it would last 24 to 26 months,\u201d Salmanson added. \u201cSo, there\u2019s at least two [quarters] left, and I don’t see anything that will turn things around in the next couple of quarters where we’re going to see a massive number of (institutional SFR) transactions. It’s going to be a few more quarters before that happens.\u201d<\/p>\n In addition, any reprieve in the housing inventory shortage created by more multifamily units hitting the market is expected to be short-lived. In recent congressional testimony<\/a>, Mortgage Bankers Association<\/strong> (MBA) chief economist Mike Fratantoni pointed out that the housing market is now extremely supply challenged.<\/p>\n \u201cWhile estimates of the needed supply vary widely, it is clear that we are millions of units behind at this point,\u201d Fratantoni said in his statement submitted this month to a subcommittee of the U.S.<\/strong> House Financial Services Committee<\/strong>. \u201cAnd even though we expect to see a large delivery of multifamily units over the next few years, this will not resolve the broader lack of inventory that we see across the country.\u201d<\/p>\n The inventory shortage \u2014 in addition to high financing costs tied to elevated interest rates and related inflation for construction expenses \u2014 led to a nearly 30% decline<\/a> in home flips in 2023, according to real estate data firm Attom<\/strong>. <\/p>\n The performance of the fix-and-flip market \u2014 in which investors purchase, rehabilitate and resell homes \u2014 can serve as a barometer for housing supply in general, given that the sector adds for-sale inventory to the market.<\/p>\n Last year, there was a total of 308,922 single-family home and condominiums flips, compared with 436,807 in 2022, according to Attom. Gross profits for home flippers also declined last year, to an average of $66,000 nationwide, down from $70,100 in 2022.<\/p>\n Attom points out that investment returns on these projects in 2023 were at levels that \u201ccould easily be wiped out by the carrying costs during the renovation and repair process, which usually consume 20 to 33 percent of the resale price.\u201d <\/p>\n \u201cIn 2023, the landscape for home flipping across the U.S. became increasingly challenging,\u201d Attom CEO Rob Barber said in a statement, adding that \u201cthe sharp decline in the number of home flips likely reflected a combination of a tight supply of homes for sale as well as dwindling returns. <\/p>\n \u201cEither way, it will take some significant reworking of the financials for home flipping fortunes to turn back around.\u201d <\/p>\n Despite the hardscrabble market realities facing SFR and fix-and-flip investors last year, 2024 could prove to be the year a rebound occurs \u2014 even if its full effect is not realized until later in the year.<\/p>\n For one, the Federal Reserve<\/strong>, despite holding its benchmark rate steady<\/a> at its March meeting, is still signaling plans for three rate cuts this year. That should help to unlock more inventory while also reducing financing costs for leveraged investors. <\/p>\n In addition, new-home construction \u2014 including in the hot build-to-rent (BTR) sector \u2014 is helping to slowly boost housing supply.<\/p>\n \u201cWhile existing home inventory is quite constrained, with about 1 million homes for sale nationwide \u2026 builders have certainly picked up their pace of construction, and new homes now account for roughly one-third of homes on the market,\u201d Fratantoni told the House committee. \u201cThis compares to a more typical 10% share of total home inventory historically.\u201d<\/p>\n There is also an expected surge of housing demand that is likely to translate into healthy sales and rental activity in the years ahead. <\/p>\n \u201cThe U.S population currently has about 50 million individuals between the ages of 30 and 40,\u201d Fratantoni said. \u201cThis large millennial cohort is in the ages where household formation is at its peak, and we are seeing roughly 1.5 million households formed each year.\u201d<\/p>\n Keith Lind, CEO of Acra Lending<\/a><\/strong>, a leading nonqualified mortgage lender, said early indications are that the year ahead looks promising for non-QM and related investment property lending for his institution. Non-QM loans typically serve clients who have nontraditional income sources, including the self-employed. <\/p>\n Lind points out that some 45% of Acra’s non-QM loans are to borrowers purchasing investment properties.<\/p>\n \u201cOur pipeline of non-QM loans is up 30% from January and February of last year, versus January and February of this year,\u201d he said. \u201cWe did $2.4 billion last year of (non-QM) originations, and we think we’ll do about $3 billion this year.\u201d<\/p>\n A review of securitization deals tracked by Kroll Bond Rating Agency<\/strong> (KBRA) that are backed by non-QM loan pools and comprised of at least 30% investment properties (primarily single-family properties) shows that in roughly the first 10 weeks of 2023, there were 17 private-label offerings with a total value of $6.5 billion that closed. This year, during the same period, 20 such securitization deals with a total value of $7.3 billion hit the market.<\/p>\n Peter Van Gelderen<\/a> is co-head of Global Securitized at TCW<\/strong>, a leading global asset management firm. He points out that investors in the secondary market are attracted to investment properties, particularly in an environment where rates are expected to soon start declining.<\/p>\n \u201cInvestors, like asset managers and insurance companies, like investment property loans because they are comfortable with the underwriting \u2014 the debt-service-coverage ratio, or DSCR, underwriting,\u201d he said. \u201cBut investment property loans also aren’t subject to the same protections as [traditional residential mortgages], meaning they can have prepayment penalties.<\/p>\n \u201cAnd so, if you have a view that the rates are coming down \u2026 you’re going to think people are going to refi more quickly, right? Then you’re going to say [as an investor], \u201cOh, how can I make some extra alpha, or money, and the way you do that is with the prepayment penalties.\u201d<\/p>\n A November 2023 report published by\u00a0The Hamilton Project<\/strong><\/a> and focused on the SFR market notes that large institutional investors (those controlling at least 1,000 SFRs or more and have a presence in at least three markets) represent about 3% of the total SFR sector. But the bulk of mega-investor holdings (354,000 of the 446,000 SFRs) are concentrated in 20 markets, which are located primarily in the Southeast and Southwest regions, the report notes.<\/p>\n \u201cFor example, Atlanta is the largest single market, with almost 72,000 single-family rental units in the [metro area] held by institutional investors,\u201d the report states. \u201cFor this market, institutional single-family investors hold 27.2% of all single-family rental properties and 9.53% of all rental properties (single-family plus multifamily).\u201d<\/p>\n It\u2019s worth noting that data analysis and size groupings in the fast-moving and wide-ranging SFR space vary across studies. They also depend on the timeliness of the data and the specific focus of the research. Cherre\u2019s Salmanson, for example, estimates that the institutional-investor share of the SFR market could be as high as 6% to 7% nationwide. <\/p>\n Fratantoni\u2019s congressional testimony<\/a> reveals that regardless of the percentage, SFRs are in great demand across the board. His congressional statement notes that some 40.4 million residents, or 39% of the 102.8 million renters nationwide, now live in SFRs. <\/p>\n In terms of expanding their holdings via open-market home purchases, however, Salmanson said the large institutional players have been essentially \u201csidelined\u201d in the current market.<\/p>\n He expects market dynamics to continue keeping these big players on the sidelines for at least the next two quarters \u2014 or at least until the interest rate, inventory and home price environment improves in their favor. In the meantime, these institutional SFR players have turned to a strategy of buying existing portfolios from smaller investors and doubling down on build-to-rent purchases.<\/p>\n As an indicator of the slowdown<\/a> in home purchases in the institutional SFR space, data from KBRA shows that in 2023, institutional operators issued four securitization offerings valued at $1.5 billion in total. In 2022, there were 15 such deals with an aggregate value of $10.3 billion.<\/p>\n \u201cSo, if I can’t buy in the open market, I either build or buy a portfolio,\u201d Salmanson said. \u201cThose are the two strategies employed in the last 18 to 24 months \u2014 rolling up the portfolios [of smaller SFR operators] and more build-for-rent.<\/p>\n \u201cI don\u2019t see any way [rent] goes down,\u201d he added. \u201cIt’s not growing at the same pace, but there’s nothing that tells you [a decline] will happen when home prices are still high. The demand is increasing for these types of assets and we don’t have enough supply.\u201d<\/p>\n Brandon Lwowski<\/a>, senior director of research at\u00a0HouseCanary<\/strong><\/a> \u2014 a\u00a0proptech<\/a>\u00a0firm that provides\u00a0institutional investors<\/a>, lenders and other clients with residential real estate analysis \u2014 said there are currently about 73,800 SFRs available for rent at the national level.\u00a0<\/p>\n \u201cThat’s up 25.7% from last year (as of March 11), so it’s a big increase in inventory,\u201d he added. \u201cYet the rental price is still staying up.\u201d<\/p>\n \u201cOn the single-family rental side is where we’re kind of in this land of the unknown, where we’ve never seen this much inventory, historically, in single-family rentals,\u201d Lwowski said. \u201cSo, that’s telling me that \u2026 there’s still enough demand to keep (rent) prices elevated even though we’re seeing inventory grow.\u201d<\/p>\n Lwowski added that national rental rates for SFRs are up 2.7% from last year even as inventory has expanded. He pointed out, however, that within the SFR space (which includes BTR), it is the larger homes that are in greater demand and that are propelling rent growth in the space, given \u201cwe\u2019ve actually seen price decreases\u201d for the smaller SFRs that consist of one- and two-bedroom homes.<\/p>\n Kurt Carlton, co-founder and president of\u00a0New Western<\/strong><\/a>, a large national private real estate investment marketplace that serves some\u00a0200,000-plus investors, said the institutional SFR players are now\u00a0working closely with builders<\/a> and \u201cguaranteeing the purchase of a certain amount of their future pipeline\u201d for the BTR market. In fact, Carlton suggests that many of these large SFR platforms now prefer to operate in the BTR space rather than purchase homes on the open market, where they compete with consumer buyers. <\/p>\n \u201cWhat I think is going to happen when these institutions do come back is they’ll start to focus more on constructed, new-build inventory,\u201d Carlton said. \u201cIt\u2019s just easier for them to forecast and manage those properties.<\/p>\n \u201cThey’re evolving to a state where they can do that, and it won’t make as much sense to focus on infill [by purchasing homes on the open market and competing with individual homebuyers].\u201d<\/p>\n The National Association of Home Builders<\/strong><\/a> (NAHB) estimates that about 8% of all single-family starts are now BTR construction. Salmanson estimates that the figure is closer to 16% because \u201ca lot of the pipeline just isn\u2019t captured yet by the data.\u201d<\/p>\n Even if the BTR market slows down a bit as projected, it\u2019s still expected to play an outsized role in the new-home market given the larger forces that affect the housing market at large.<\/p>\n \u201cDemand by investors for single-family rental units, new and existing, has cooled in recent quarters as financial conditions have tightened,\u201d NAHB reported. \u201cGiven affordability challenges in the for-sale market, the (single-family BFR) market will likely retain an elevated market share even as the sector cools in the quarters ahead.\u201d<\/p>\n New Western\u2019s Carlton points out that there also are some 15 million vacant existing homes in the U.S., with one-quarter of these built prior to 2008 and starting to \u201center a phase where they need to be rehabbed for the first time.\u201d He said this is a prime market for fix-and-flip investors given the shortage of for-sale inventory.<\/p>\n \u201cFor example, there were 50,000 new homes constructed by builders last year in Dallas-Fort Worth,\u201d he said. \u201cAnd there were 17,000 homes that were purchased and then resold as flips. <\/p>\n \u201cSo, that\u2019s about [one-third] of the new inventory that\u2019s coming from homes that have been remodeled and returned to the market. \u2026 I see fix-and-flip investors as one way to help alleviate [the housing inventory issue] because they can at least bring what was off the housing market back to the market.\u201d<\/p>\n John Burns Real Estate & Consulting<\/strong> conducted a recent survey of fix-and-flip investors and found that 49% of those polled expect to acquire more properties in 2024 than they did last year, despite the challenges they faced in 2023. <\/p>\n Arvind Mohan is CEO of fix-and-flip lender Kiavi<\/strong>. Mohan said the John Burns survey is already hitting home for the lender, which he said posted \u201ca notable uptick in fix-and-flip loans in our pipeline in the first six weeks of this year relative to the same period last year.\u201d<\/p>\n \u201cThe biggest challenge for flippers in 2024 is acquiring new properties while housing stock\/inventory is limited and there are few \u2018good deals\u2019 available that make sense from an investment perspective,\u201d Mohan said. <\/p>\n Still, despite the challenging market in 2023, last year was a banner year for Kiavi. The company funded a record $4 billion in fix-and-flip and bridge loans across some 13,000 loans to 5,800 individual investors, representing a 7% year-over-year increase in volume, according to a company announcement<\/a>.<\/p>\n One sign of the proverbial sun starting to peek through the clouds that have hovered over the market since early 2022 \u2014 when the Federal Reserve<\/strong> began to raise benchmark rates \u2014 is the return of institutional capital to the private-label securitization market, which is facilitating greater liquidity in the primary market.<\/p>\nLooming rebound<\/h2>\n
Secondary market<\/h2>\n
Geographic growth<\/h2>\n
Not enough supply<\/h2>\n
Optimism ahead<\/h2>\n