Who rents out houses?

By Felix Salmon
August 19, 2010
Barbara Kiviat raises an interesting question: who is going to rent out all those houses which got bought by people who never should have been homeowners in the first place?

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Barbara Kiviat raises an interesting question: who is going to rent out all those houses which got bought by people who never should have been homeowners in the first place?

According to government data, 89% of single-family detached houses are owner-occupied. Meanwhile, 83% of apartments are rented. There is a certain logic to this. An apartment building provides an economy of scale for a landlord that a suburban housing development doesn’t.

To a certain extent, the necessary decrease in homeownership that the US has to see going forwards is going to be driven by urbanization. But that 89% figure is going to have to come down too, especially in areas like Las Vegas and Phoenix which saw a massive number of houses built to satisfy demand from subprime borrowers. So, who will the new landlords be, as we go from a country where 11% of detached houses are rented to one where that number is significantly higher?

They won’t be individuals, I don’t think. There’s something very eggs-in-one-basket about buying a big suburban home just to rent it out: a single bad tenant can devastate you, financially. But at the same time, property management companies understandably much prefer to look after big apartment complexes than sprawling suburban subdivisions.

In an era of very low interest rates, the relatively high rental yields on houses would be quite attractive to investors, I think, if they could somehow be turned into tradable securities. But the costs of buying and managing all those properties would surely be so substantial that they would take a substantial bite out of headline rental yields.

So who will end up renting out America’s suburban homes? I haven’t got a clue, myself, but I suspect it’s going to be a growing business in the years to come.

16 comments

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The neighbors, maybe? Sure it’s a big, leveraged, undiversified investment, but so is the primary residence next door, and that didn’t stop the neighbors from buying in the first place (granted, they had mortgage interest subsidy). The relative advantage here is lower management costs due to proximity; you can keep an eye on the property and renters.

Even better: the retiree neighbors’ urbanite kids (though they themselves are still renting). Well, maybe in Florida and Arizona, anyway.

Just a theory.

Posted by Sandrew | Report as abusive

I hope someone does it, speaking as someone in the market to rent suburban housing and would prefer to not live in an apartment complex.

Posted by renter | Report as abusive

REITs?

Posted by dWj | Report as abusive

Who rents out houses?

Just a guess: the owners.

That would be the feds, now, wouldn’t it, in the form of Fannie and Freddie?

Posted by felix_reuters | Report as abusive

I don’t know how mobile the US workforce is, but in many cases it is families moving for short assignments (e.g. 2 years) who rent out their home since selling/buying/selling is expensive in comparison. Without a rental market homes become a significant brake on workforce mobility, which is a brake on economic development. Here in Australia the bulk of single-family homes that are up for rent are owned by families working overseas. The downside (as a tenant) is that it’s hard to get a long-lease since the owners usually don’t want to be locked-out for a long period (in case their assignment comes to an end).

Posted by nicfulton | Report as abusive

It’s going to depend on the city. College towns already have high percentages of rentals that include lots of detached houses.

For example, housing in Boulder CO is ~60% rental – and very little of it is traditional apartment complexes. Lots of condo’s, small (4-8 units) complexes and single family homes. There are property mgmt companies (notoriously exploitative to tenants) that own dozens of houses around town.

Another common scenario is someone buys an entry level house – then turns it into a rental when they trade up in houses. There’s a significant number that own 5-10 houses that they rent out. And there are people that specialize in buying condo’s to rent out. Rents are high, damage deposits are huge.

My understanding is this is also true in places like Ann Arbor as well.

Obviously this can’t apply in every market. And the more spread out the market geographically the harder the logistics.

My real concern in a big market like Phoenix – if there is a huge flood of rental units into the market then isn’t that going to pressure rents down? You’ll only make money if you can cover costs – including financing if you didn’t have enough cash to buy outright. And what happens to those large apartment complexes if people can move into a house for the same rent? (not that all would want to). They may not be as profitable in these kinds of locations.

Posted by jobo | Report as abusive

Ha, wouldn’t that be a sight if Frannie became the premier housing rental corp in America! THAT would help generate some tax dollars no? Better that trying to push these houses to market at 40c on the dollar…

Posted by CDN_finance | Report as abusive

You are assuming 100% of the homes will be livable. I’d bet that a substantial number will be so trashed by the time the owner, be it Fannie/Freddie/Bank/investor or neighbor, starts the rental process, that it will be cheaper to bulldoze them than it will to repair them to livable standards.

Posted by stanrich | Report as abusive

“in areas like Las Vegas and Phoenix which saw a massive number of houses built to satisfy demand from subprime borrowers.”

What’s your evidence of that? Most of those houses were sold to second-home buyers and people emigrating from other states. Unless the definition of “subprime borrower” is “Yuppie picking up vacation spot”–and it maybe should be–the buildouts in Ashesville and Lost Wages weren’t for Subprime.

Posted by klhoughton | Report as abusive

People who walk away from their mortgages often find bigger homes to rent at 1/3 their previous monthly nut

Posted by STORYBURNthere | Report as abusive

In the States as in the UK, from Reagan/Thatcher onwards, The Big Idea was the property-owning democracy. Simple theory: put people in their own home and they’ll become more right-wing.
In the same way that savings & loan and building societies should never have entered the shark-infested pool of global banking, so too huge swathes of the population should never have bought a home.
We’re coming to the end of a forty-year cycle in domestic property: this isn’t just ‘another bust’, it’s a radical price realignment in the context of our nations getting poorer.
I really believe you can only sell so many houses at auction – and very few when the climate is this bad. Renting will become far more normal over the next decade; and yes, it will be a good time to be a landlord – IF you can find a tenant with references.

http://nbyslog.blogspot.com/2010/08/defi cit-crisis-shock-for-big-4-as.html

Posted by nbywardslog | Report as abusive

I think this is a ‘big city’ prejudice.

Most apartments, I think by nature of the product, are in big cities – of which covers what % of the overall housing market (I don’t know, I’m asking)?

Then, if *most* of the housing market is outside ‘big cities’, then it would seem logical that there is a relatively significant market for rental homes.

I’ve lived mostly in smaller metro areas (as a kid, college and adult) and apartments are not as common as the rental housing market since the demand is so low for them. That might be an answer to the question of ‘who is going to be renting those houses’ – i.e. anyone that cannot buy and does not live in a ‘big city’.

Posted by terrymj | Report as abusive

Around military bases active duty rent houses from retired military who settled in the area to be able to shop at the PX which they can do with their retired military ID.

Enlisted who live off base get a housing allowance that is included in their pay check. Their landlord has to be approved.

At a large base their will be a “housing officer” who is relatively junior in charge of a civil service employee who is relatively senior and they will vet all the rental contracts.

Frankly, it is a science.

The reason that it can’t be fixed on a “macro” scale is not that people borrowed so much it is that “investors” lent too much. It is these investors that want homeowners bailed out.

Bases expand and contract all the time. The government should look there for experience in handling real estate.

Posted by bidrec | Report as abusive

By and large, no one will rent them: they will be destroyed.

Poorly understood, I think, is the deterioration in building practices in this country over the past thirty years or so. The Atlantic Monthly–parts of which have still not been destroyed by Megan McArdle–ran an illuminating piece on this back in 2008:

“Hollow doors and wallboard are less durable than solid-oak doors and lath-and-plaster walls. The plywood floors…break up and warp as the glue that holds the wood together dries out; asphalt-shingle roofs typically need replacing after 10 years. Many recently built houses take what structural integrity they have from drywall—their thin wooden frames are too flimsy to hold the houses up.”

http://www.theatlantic.com/magazine/arch ive/2008/03/the-next-slum/6653/3/

Call it the Wal-Martization of American housing: we went for size at the expense of quality. Modern housing is not, in fact, much of a capital investment. Only the land is likely to still be there in another fifty years. A season of neglect, and these things fall apart. They’re not worth fixing. The story of housing will be a slow but relentless destruction of wealth for probably the next 20 years. –At which time, perhaps, I will still be living in my 1927 bungalow. Conceivably, people will want to learn to _build_ again by then.

Posted by ckbryant | Report as abusive

I don’t know who will be doing it, but I hope someone is. My wife and I will be looking for one in about a year and a half.

Posted by drewbie | Report as abusive

I would think we’re seeing a huge increase in the number of families who will be forced into renting houses in this economy. In rural and low income areas house rental as oppposed to ownership is usually at a higher percentage than in more affluent areas but in the current climate incomes are dropping nationwide. Couple this with the horrific housing market and the shambles that is the home loan sector and you can expect a huge uptick in families choosing to rent rather than buy.

Mathieu
http://www.cocoonbarcelona.com/

Posted by MathieuBCN | Report as abusive