Low Homeownership Rates Push Homebuilders into Rental Market

open house for rentals

open house for rentals

Lennar homebuilder made a big move when they decided to enter the rental market after disappointing homeownership rates. Now, according to a report from Bloomberg News that risk could be paying off, influencing other homebuilders to make the jump and increase their rental properties.

The business news company reports, Lennar opened its first community of single-family rental homes this month in Sparks, Nevada, and has a construction pipeline of 20,000 apartments exceeding $5.5 billion, the Miami-based company said today.

“We’ve seen and continue to see outsized improvement in the rental market in terms of low vacancies and higher rental rates,” Chief Executive Officer Stuart Miller said on Lennar’s earnings conference call Thursday. “The inability of the American family to access the mortgage market” is forcing many families to consider renting single-family homes because they aren’t able to buy.

The U.S. homeownership rate fell to its lowest level in 20 years at the end of 2014 at the same time the rental housing vacancy rate dropped to its smallest share since 1993, according to the Census Bureau. Demand has shifted toward rentals as millions of homeowners lost properties to foreclosure and potential buyers couldn’t afford to own real estate or had trouble qualifying for loans.

Sales and construction of new homes remain below historical averages. Single-family home starts plunged 15 percent in February from the previous month to an annual pace of 593,000 as bad weather slowed development, the Commerce Department reported this week. The average since 1995 has been 1.04 million.

Institutional investors have purchased more than 528,000 single-family rental homes for $68 billion since 2011, creating a new asset class in what has been a mom and pop industry, according to a report this month by Haendel St. Juste, an analyst at Morgan Stanley. Most of the houses bought by landlords such as Blackstone Group LP’s Invitation Homes, with 47,000 rentals, and American Homes 4 Rent, with 35,000, have been foreclosures, which cost less than the new houses Lennar is offering.

Lennar held a grand opening March 14 of model houses at Frontera at Pioneer Meadows, an 80-home community near Reno, Nevada. Rents will start at $1,399 for the two-, three- and four-bedroom properties with amenities such as finished yards, stainless steel appliances, granite countertops and washer-dryers.

The single-family rentals are an experimental “hybrid between our for-sale and our multifamily apartment community program,” Miller said on the call. “If the rental concept doesn’t work as well as we’d like, we can always convert to a for-sale platform.”

Lennar’s offering of houses for lease “may be a wise business move since first-time mortgage availability remains constrained versus historical norms,” Jay McCanless, an analyst with Sterne Agee & Leach Inc. said in a March 16 note to clients.

Toll Brothers Inc., the largest builder of luxury homes, has also entered the rental-apartment and student-housing business as a hedge against uneven demand for new-home purchases.

Lennar on Thursday reported better-than-expected net income for the three months through February of $115 million, or 50 cents a share, up from $78.1 million, or 35 cents, a year earlier. New orders climbed 18 percent to 5,287 homes and increased 25 percent in value to $1.8 billion.

Lennar was little changed Thursday, closing at $49.65. The shares are up 11 percent this year, compared with a 3.5 percent gain for the 22-member Bloomberg homebuilding index.

Source: TheMReport.com