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COVID-19 has exposed many weaknesses of our modern economy, and it has boiled our lives down to the essentials. As most of us have had to spend more time at home, we are now having to look to our dwellings for more than just shelter. We now commute to work from our bedrooms to our home offices, shop through Amazon, have our groceries delivered by Shipt, work out on our Pelotons, stream our TV shows and movies through Netflix and even send our kids to school via Zoom.
As most of us are home, we are looking for properties with more space in less dense areas of the map. The first advice most hear in regards to real estate is “location, location, location.” While this may always be an important axiom guiding real estate investment, the desired location may be changing. As we transition to a more virtual world, our physical location may become less important relating to work, retail and entertainment. While it may be too early to deem it a trend, many Americans with means seem to be fleeing to areas with less density.
Recently, Redfin CEO Glenn Kelman commented on a recent surge in demand for rural homes: “Rural demand is much stronger right now than urban demand, and that’s a flip from where it’s been for the longest time, where everybody wanted to live in the city. We’ll see how it comes back, but there seems to be a profound, psychological change among consumers who are looking for houses.” As the pandemic began to spread in New York City, the Wall Street Journal reported that many New Yorkers fled to their summer homes in less dense locations, like the Hamptons. Now that many companies’ workforces are able to work remotely, proximity to the headquarters may become less important.
Although the demand for homes has never been higher, the ability to purchase a home may become more difficult. This is due to a skittish mortgage market that is trying to absorb daunting headlines showing astronomical unemployment claims. In an interview with CNBC, Andy Walden of Black Knight, a mortgage and data analytics firm, stated that 6.4% of all mortgages were in forbearance as of the end of April. The pandemic swiftly caused home sales to take a sharp turn downward. The National Association of Realtors recently reported that home sales dropped 8.5% from February 2020 to March 2020.
If most would-be homebuyers cannot purchase a home, this may put additional strain on the already tight rental housing market, especially for affordable stock. Additionally, the pandemic may shift demand toward single-family rental homes, where there is less common space and typically more square footage than multifamily units. According to America’s Rental Housing 2020 report, prepared by the Joint Center for Housing Studies of Harvard University, “In 2018, about a third of the nation’s 47.2 million rental units were single-family homes.” The same study also noted that in 2018, single-family rentals decreased by 291,000 units, or nearly 2%, for the second year in a row as these rental units were converted back to owner-occupied units.
Now, it may be wise for real estate investors to invest or diversify into the growing asset class of single-family rentals. Demand seems to be high, but where is the supply? The United States started the Great Recession with too many homes, but it appears we may be starting this next chapter with too few. As demand and financing retreated during the 2008 crisis, homebuilding ceased. In recent years, single-family homes have not been constructed at the same pace as multifamily units. Several factors have contributed to this, including rising costs for labor and land, but restrictive local regulations have had the greatest effect. According to a June 2019 New York Times article, many local governments were looking to limit single-family construction in favor of more multifamily construction in order to battle the home affordability crisis.
What kind of homes are needed? The U.S. Census Bureau states that the median household income (in 2018 dollars) 2014-2018 is $60,293. Based on this income, 22% would be withheld for federal income taxes, leaving approximately $47,000. This breaks down to approximately $3,917 a month. Assuming most landlords require that a tenant earn three times the monthly rent, then most Americans can afford no more than around $1,300 per month for rent before utilities. If an investment home can gross $1,300 month or $15,600 annually and the gross rents are 9% of the value, then it appears an affordable home is valued around $173,333. For comparison, the National Association of Realtors is currently reporting that the March 2020 median price of homes in the U.S. is $280,600 or around 62% higher than an affordable level.
Based on the lack of affordable homes and the ever-growing demand for homes in less dense areas and more square footage, investors may be wise to direct funds into this space through build-to-rent developments, single-family rental home REITs, purchasing homes through online platforms like Roofstock and Renters Warehouse (which I’ve personally used) or through local real estate investment companies. Homes are now more than just where we hang our hat. They are the key to the stay-at-home economy.