Build-to-Rent Market: Positive Rental Outlook Due to Stalled Housing Inventory

The 2022 real estate market outlook experienced many ups and downs during 2022. Higher mortgage rates, lower house sales, and dropping lumber prices has created a unique environment where homebuyers are moving away from making that first home purchase. Inflation and higher prices across the product market, from food to gas, forced people to have deep concerns on how to manage their monthly budgets. These factors have caused the build-to-rent market to surge this year.

What’s Going On?

Many factors created the build-to-rent surge. Real estate experts first predicted that the 2020 pandemic would halt home sales with more people staying out home. However, the opposite happened.

Record low interest rates, pandemic stimulus checks, and people switching to work-from-home setups had people enter a hot seller’s market all the way into 2022, CoreLogic found that investors buying up single-family homes at a record of 28% in 2022. In turn, home prices increased.

Meanwhile, contractors had slowed down in building homes due to high lumber prices. This circumstance led to lower, available housing inventory. Moving from the summer into the fall of 2022, lumber prices fell, as contractors went back to creating more single-family homes.

However, the Feds raised mortgage rates repeatedly throughout the year for 30-year mortgages in an effort to tame inflation. Last year in October, interest rates were 3.14%, according to PBS Newshour. This year in October, interest rates have risen to 7.08%.

Entering the fall of 2022 saw that people were dealing with inflation, high mortgage rates, high home price, and stalled housing inventory. Instead of looking for a dream home, people switched up to looking for homes they could rent until the real estate market turned more favorable.

Build-to-Rent in a High Rental Occupancy Timeframe

With home buyers now becoming home renters, contractors turned to pumping out more homes to enter the build-to-rent market. The Association of Home Builders found that 69,000 build-to-rent houses began construction during the last four quarters with 21,000 single-family build-to-rent starts had occurred in the second quarter of 2022, according to Fin Ledger.

Even the high demand of rentals is placing huge demands on the construction industry. In the fourth quarter of 2022, most single-family homes were occupied at an outstanding 94.9% rate. Despite record high rental prices, these occupancy rates have been the highest seen for over 25 years.

By building tens of thousands of new homes that are solely going into the rental housing market, this aspect may help bring more stability to a housing market that has undergone huge unpredictability in the past 2 years. However, there is still a caveat with this scenario.

With so much new construction pouring into the rental market, people may find homeownership remains elusive if there is never enough housing inventory at the right locations that is available and accessible to them. In addition, rising rental rates may lock them into a scenario where it is not practical to constantly move every few years.