‘Build to rent’ is now taking over parts of the U.S.

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Published Date 11/18/2024

Business Insider’s James Rodriguez says home builders have too many new homes on their hands these days.

“Thanks to a construction boom years in the making, homebuilders are sitting on more newly completed homes than at any point since 2009, when the market was reeling from the global financial crisis,” he says. “Despite the hefty ready-to-sell supply, a sizable chunk of those homes may never be sold to regular buyers. That strange reality says a lot about the hurdles for would-be homeowners right now.”

Rodriguez reports that homebuilders and buyers are navigating a complex market as housing prices continue rising across most of the country. While mortgage rates briefly declined over the summer, they quickly jumped nearly a full percentage point in just one month. According to John Burns Research and Consulting, buying a starter home is now about 45% more expensive than renting, far exceeding the historical average gap of 15%.

"Builders will try a lot of other things first," says Keith Hughes, an executive at housing research firm Zonda, referring to alternatives to price cuts. "And we're not seeing drastic price drops virtually anywhere.”

The market has shifted significantly. There were 108,000 finished homes for sale at September's end, 48% more than the previous year. Additionally, 258,000 homes were under construction but unsold, compared to 194,000 in 2019.

Rather than slash prices, builders are exploring other options. Lennar, a major homebuilder, offered average sales incentives of $48,100 per home from June through August, up from $36,400 the previous year. They're also building smaller homes and turning to the rental market.

"I think investors are more or less saying to themselves, we're providing a solution here for builders, and that solution is inventory management and getting out of inventory that otherwise they're having trouble selling," explains Adam Stern, founder and CEO of Strata SFR.

Rodriguez adds that the rental strategy has gained traction. D.R. Horton, the nation's largest homebuilder, reported about $800 million in single-family-rental property on its balance sheet, including 3,140 homes and 1,900 buildable lots. According to Forecasa, investors purchased 3-5% of builder-sold homes in the past three months, up from about 1% a year ago.

"It may seem like a small percentage, but if you think about just the sheer volume of properties that are being moved, it's a fairly large number, especially because it's growing," notes Sean Morgan, Forecasa's CEO.

Some builders are opting to hold properties and rent them out until market conditions improve. "They know if they work on a rental campaign, they've got an exit," says Ray Sturm, managing partner of Tower1.

The situation reflects broader housing market challenges, according to Rodriguez, who cites CoreLogic's chief economist Selma Hepp: "The market is in limbo. It's sitting on the sidelines. It's waiting."

The rental trend points to persistent affordability issues for buyers. With existing homeowners reluctant to sell and mortgage rates remaining high, many potential buyers are forced to rent. Redfin data shows renter households are growing three times faster than homeowner households.

BusinessInsider, TBWS

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