The American (rental) dream?

Make Me Smart April 26, 2022 transcript

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Amy Scott: Hey, everybody, I’m Amy Scott, welcome to Make Me Smart, where none of us is as smart as all of us.

Kai Ryssdal: I’m Kai Ryssdal. It’s Tuesday, we are doing a deep dive, the weekly deep dive into a single topic today. It’s something called a build to rent being used to describe one of the biggest trends, the hottest trends in the housing market. Where, well we’re going to tell you what it means we’re not going to spoil the surprise, we’re just going to keep you waiting around.

Amy Scott: Okay. I’m gonna spoil it right now.

Kai Ryssdal: Oh all right.

Amy Scott: A growing number of homes are being built exclusively as rentals. And these are single family homes built not to buy but to rent out. Billions of dollars are flooding into this industry. So we’re going to look at what this means for the housing market for homeownership, and also the ability for folks to build wealth through housing in this country.

Kai Ryssdal: Here to make us smart on this today is Dejan Eskic. He’s a senior research fellow at the Kem C. Gardner Policy Institute at the University of Utah. Thanks for coming on the podcast today.

Dejan Eskic: Thank you for having me. Pleasure to be here.

Kai Ryssdal: So we gave you the thumbnail sketch, right of what Bill to rent is what does it mean out there sort of, you know, as you drive around suburbia today?

Dejan Eskic: Yeah, well, you’ve noticed housing is kind of the topic of conversation right now. And then country amongst everything else. And this asset class has been around for a while, if we just go back to the 70s, just single family rentals in general have represented about a third or a little over a third of the housing stock, or the rental stock, excuse me. And build for rent really has really taken off the last five years. So half of all the built for rent communities, there’s roughly about 700, somewhere between 650 to 700 of them, depends how you categorize them. But half of those have come online the last five years. So – and they’re heavily concentrated sort of in the southeast and southwest, the Phoenix, the Atlanta’s that sort of corridor, and we’re seeing roughly about currently, the last two or three years, we have over $50 billion of money pouring into it over 70 plus different partnerships between institutional investors, builders, REITs, coming into the space, and they have a lot of different strategies. A lot of them are going into the built for rent space, but some of them are also acquiring existing single family homes.

Amy Scott: Right, because this whole thing started really with investors buying up existing single family homes and renting them out after the housing crisis of the last decade, right? How did we get from there to here?

Dejan Eskic: Right, it’s really about stability and performance, if we looked at just returns in the residential category, over the last three years, the last five years, single family rentals have outperformed apartments. If we looked at just overall, all the other asset classes, really the only two in the last three years that have outperformed single family rentals have been industrial buildings, and storage spaces. And so if you think about just building, right, it’s really difficult and takes a lot of capital to build a large industrial facility or a portfolio of storage spaces. So single family rentals are a much easier entryway. And also the resistance recently, you know, with the “Not in My Backyard” attitude towards rental and apartment construction, that opposition to single family rentals aren’t there. So it’s much easier to get your entitlements to get your permits to convince the city to let you build. And so the entry point is really easier. And also a stability, you know, over 43%, 43 to 45% of those who rent single family homes tend to stay there for five years or longer. So the turnover is much, much lower, and in single family rents. So it’s about stability, really when it comes down to it. It’s especially in an inflationary period in an economic uncertainty. It’s much safer to put your money into single family rental at the moment.

Kai Ryssdal:  Can I ask a really stupid question you alluded to in your first answer about communities specific communities being built as build to rent. I understand that to mean that it’s like, there’s a subdivision being built, and everybody knows that these homes are not going to be sold, they’re going to be rented out. And that’s what they’re there for. And thank you very much. Is it that straightforward?

Dejan Eskic: More or less, the attraction of it is, they’re kind of also built with the amenities of, say, a nice apartment complex. So you have a pool, maybe you have parks, trails, so the interest of you know, a for sale, single family, it’s get in and get out, and we’re good to go. But in a build for rent community, it is more about having a, a an amenity package of sort that is benefiting those renters.

Amy Scott: So these projects are taking off at a time when there’s this shortage of housing of any kind, really, but, you know, home – people who would like to be home owners are saying there is harder to compete with investors paying cash. And I’m wondering if all these homes are getting build for rent to begin with? What does that mean for people who just, you know, want to get into the housing market and buy a home?

Dejan Eskic:  Yeah, I mean, it’s really difficult to afford, be a new first time homebuyer right now. And part of I think what the investors saw is we’re in this great demographic patch, where the largest share of first time homebuyers since the baby boom is between 30 to 35 year olds, we’re having this wave of demand in literally every area of the country, it’s not just exclusive to some metros. And so the demand for housing is just through the roof. And so having the single family rentals, they’re just another competitor. But also it’s kind of a double edged sword, they are bringing a much needed rental product that is very thin, in most places, single family rentals, you know, we often think about apartments. And, you know, if we look at just the share of single family owners, you know, 77% of single family owners have only one to two units in their portfolio. And so that, that brings up a whole sort of another competition. So the real place where it’s hurting right now is on the land. So in the southeast and southwest, you know, the these build for rent communities, or partners are probably purchasing roughly about quarter to a third of all the lots that they’re going to build on. So it is it is squeezing people out. But also there’s, they’re just another competitor because we’re so low on housing supply, and we have a national housing shortage across the country, that that’s why they’re in this market, because they see the opportunity. And so – go ahead.

Kai Ryssdal: Yeah. So, so in your considered opinion, and – not opinion. I mean, you’re a guy who knows his facts here. This adds to the housing supply, and lets more people have adequate housing in this economy. Is that what I hear you’re saying?

Dejan Eskic: Yeah, the situation is pretty difficult right now that any housing helps to alleviate prices. But But I agree with you on the wealth generation, you know, we’ve all – we are a nation of owners, we’re not a renter nation. And so that that does get to the question of wealth creation. And, you know, if you choose to rent, you probably have the means to build wealth in other ways. But the attractiveness of housing has always been you kind of build two birds with one stone, you are paying for your shelter, but you’re also building wealth at the same time. That’s the risk –

Amy Scott: How much do we know about how much of this is people choosing to rent versus they have to rent because they can’t afford to buy?

Dejan Eskic: Yeah, I mean, it’s, I would say it’s about on the single family front, it’s about half of it split. If I’m guessing, again, it’s very difficult to kind of break this down. But most often when we when we just look through national survey, we see that people who choose to rent do it out of the ease of renting the headaches of homeownership. I’ve recently bought my first house and you know, sometimes I wonder if…

Amy Scott: Congratulations.

Kai Ryssdal: Yeah, congratulations or condolences? You know, we got a leak upstairs I’m still trying to figure out. So yeah.

Dejan Eskic: Depends on the on the day, but so that’s the attractiveness of it is you can still have that sort of family lifestyle and have kids and everything and not feel squeezed for space, especially in the suburban markets of the Atlanta’s the Phoenix’s, those areas like that. And so – but those who have no option, but to rent, it’s often because they don’t qualify or they don’t have enough for a downpayment. And right now where we are in the housing financial situation for renters to qualify is very difficult with interest rates going up and so forth. That ability to become a homeowner has just been pushed further out ahead a couple years.

Kai Ryssdal: Do you think this is a – canary in the coal mine is probably a little strong. But do you think this is sort of a precursor of a more sharp decline in the homeownership rate in this economy, and it’s been down since financial crisis? Do you think it’s going to keep on going down?

Dejan Eskic: I – depends on the area I, I hesitate to say yes but I my gut is telling me yes. And I hate to feel that way. But it is because I think the builders, the home builders learned a valuable lesson in the last crisis as to not oversupply the market and just not allow any investor to buy. Those that allow investors they vet their investors. So they have a vested interest to make sure that their communities that their brands are seen as a stable participant in the economy, right. And so from that perspective, I feel like we’re no longer in an environment where we’re just going to overbuilt housing, like we have in the 2000s.

Amy Scott: What do you think this is going to mean for rent, which has been going up, you know, almost as rapidly as home prices? Is this adding to the rental supply or because you’re describing these this kind of amenity-rich, you know, maybe higher income renters , it’s not going to make a big difference?

Dejan Eskic: I think it’s, it’s adding to the rental supply, obviously. But because we’re in such a strong housing demand demographic patch, we’re just behind the curve, because we under built for, for the last six or seven years, after we kind of worked out all the housing oversupply from the last recession. So we’re going to continue to see, especially with inflation, we’re going to continue to see rents and housing prices go up. I think housing prices could be hitting a ceiling soon, because of the rates. So I’m watching by the week just have existing for sale supplies coming online, that tells me just how much housing demand will sort of alleviate because of the rates. So, you know, not to say I’m a fan of the big rates, but I think we need the higher rates right now just to calm the house price growth that will help on the rental side a little bit as well.

Kai Ryssdal:  Who are the renters in a lot of these build to rent communities? Or is it is it tough to say, I’m just I’m thinking about the people who were traditionally squeezed out of homes in this economy, right, the lower end of the income spectrum, people of color, the you know, all the people we all know, can’t sort of get ahead.

Dejan Eskic:  Yeah, typically, when we break it out, just by structure occupancy, from the sensor, census data, you typically see associations with single family rentals, they tend to have a bit higher incomes than say, those who are in an apartment, and larger family size. So they could either have a, you know, their mom or dad living with them, or grandparents or they have kids. So the larger family size is typically those who occupy rentals. So that’s why too, you know, in the suburban markets where we tend to have more geography with more population growth, we’re seeing an influx of single family rentals to target that market, family market, because they’re finding that those families are having a hard time getting a homeownership, getting the space. So that’s why they see that opportunity to fill that void.

Amy Scott: I guess just one, one last question is, I kind of don’t know how I feel about this. And I’m thinking about a guy who I met on a bus in, in Florida a couple months ago, at the International Homebuilders show. And he’s a builder, a traditional builder, but he said he was getting into the build to rent market, and he kind of felt bad about it. It was like “I don’t think it’s great for society. But you know, there’s a lot of money there.” And I’m wondering, I mean, what do you think is this good, bad, neutral on the whole?

Dejan Eskic:  It’s – I don’t want to say the word neutral. I think it’s both and it depends, where I think it has the opportunity to get out of hand. And for a lot of money to get in and we could overbuilt the market. But I also feel like right now, just given how expensive housing is, how millennials are behind the curve on homeownership on the ability to start families having that opportunity to rent something larger without paying, you know, four or $5,000 it is an opportunity to start families. Right. So I think there’s both a negative and a positive to it, you know, but I also see some resistance in some markets for those who are purchasing and renting homes. You know, they’re forming HOAs and saying, we’re not going to allow that here or we’re only going to allow you know, X percent of neighborhood to be purchased by investors and rented.

Amy Scott: Right. There’s a lot of pushback. Well, Dejan Eskic, thanks so much for sharing your research with us. He’s at the Kem C. Gardner Policy Institute at the University of Utah.

Dejan Eskic: Thanks for having me.

Kai Ryssdal: Thanks a lot. Yeah, I have to confess that was a totally new one to me the whole build to rent phenomenon. I knew nothing about it. And that’s why it’s awesome to have Amy Scott on this podcast because she covers housing and she knew it. And she was like, we got to talk about this. So we did.

Amy Scott: Yeah. And I’ve been wanting to look into this for a while. It’s one of the stories I just haven’t gotten to. So I’m so glad we got to dig in a little bit.

Kai Ryssdal: Excellent, me too. Let us know what you thought about the conversation, would you what do you think about a build to rent? Did you know about it? Was it a new thing? Is that happening near you? Let us know. Let us know. Give us a call. Our number is 508-827-6278. 508-U-B-SMART is how you do that in letter form. Or just a plain old voice memo and [email protected] we’ll get it on the pod. We’ll be right back.

Kai Ryssdal: All right time for the news fix. And Amy Scott housing correspondent goes with the housing news of the day I believe.

Amy Scott:  Yeah, I’m gonna stick with housing. And this is really good context for what we just talked about, which is home prices. So the S&P CoreLogic Case-Shiller US National Home Price Index. I know it’s a mouthful. Alright. It’s hard to abbreviate. We’re going to call it Case-Shiller from here on out, was up 19.8% in February from a year before 19 –that’s, I mean, basically 20% home price growth, which is even more than it was in January. And some of the cities I mean, Phoenix up 33% and it’s been the fastest growing city price wise for 33 straight months. Tampa really close behind Miami prices were up 30%. I mean, every one of the 20 cities that they track in their 20 city index saw double digit increases year over year.

Kai Ryssdal: Crazy.

Amy Scott: So yeah. Oh, and by the way, that 19.8% national increase was the third highest reading in the 35 years of this index. So this is pretty crazy. But that was February. Right? There’s a lag in this data. We did a whole explainer about why that is on Marketplace a few weeks ago if you’re interested in that story. But obviously, Kai, a lots happened since February, mortgage rates have gone up sharply. I think – I looked into this, it was about 3.75%. At the end of February for a 30 year fix, that was the average. Now it’s 5.11%. So more than a point full point higher. And there are signs the market is slowing down a little bit, new home sales fell last month we just learned today. So did existing home sales for the second month in a row in March. And I think there’s some good news at the bottom of this release, which is they say the macroeconomic environment is evolving rapidly and may not support extraordinary home price growth for much longer, so here’s hoping.

Kai Ryssdal: Which would be a good thing. I mean, apologies to all your homeowners out there, of which I’m one but it’s not real man. That’s the problem. It’s just not freakin’ real.

Amy Scott: It’s not, it’s really not good. This is not healthy. We would all benefit from slower price growth.

Kai Ryssdal: All right, so I will I will blow quickly through mine. It is a tale of 12345678, 8 letters, the first four of which are TWTR. That is of course the Twitter ticker symbol, which trades on the New York Stock Exchange which today as of this taping right now at 10:30 in the morning on Tuesday, is it $49.91 Why is that interesting? Well, because in short order, if you own a share of Twitter, you’re gonna get $54.20 and so I’m trying to figure out what the market is trying to tell us by pricing this stock now at 49.90. Do they not think Musk is gonna go through with it? Do they think regulatory things are going to impede this? I can’t quite figure out why the market is is bewildered about this. So if you know, let me know because that’s an easy five bucks. Oh, and look at this, it’s going down now as we speak 49.88. It’s an easy five bucks, right you buy a share of Twitter today, you hang on to it till the closing date of the deal. And your five bucks to the good. I don’t quite understand that. So that’s one thing the second four letters of my news fix today are TSLA, right which is, of course, the ticker symbol for Tesla, you know, one of Elon Musk’s other companies, which today is down waiting for my browser to load here. It’s down 11.1%. Right. $886 a share off $111. And here’s why. Because Musk is going to have to sell or has given as guarantee against his loans. A buzzoodle full of Tesla shares. Okay, so you kind of can’t do one of these deals Elon Musk, without the other one. And so if you’re a Tesla shareholder, you’re like, oh, man, Elon is gonna unload a bunch of shares. I might as well get out now. And look 11% down on the day, and we’re not even you know, at lunchtime yet. Well we’re at lunchtime in New York, but you know what I mean? It’s, there’s, it’s a very dynamic environment, shall we say? So I need an answer to the Twitter trading $5 below the offer price. And then obviously, we all know why Tesla is going down. I just, I just – caught my eye today. Caught my eye.

Amy Scott: But those those Tesla folks aren’t just moving their money into Twitter. It looks like.

Kai Ryssdal: No, no, they’re not they’re – that’s right. That’s right. That’s right. So there you go. So that is, that is my news. That is Amy’s news and onto the mailbag we go.

April: I can, Kimberly’s Godfrey from San Francisco, from Charleston, South Carolina. And I have a follow up question. It has me thinking and feeling a lot of things.

Kai Ryssdal: Is that a new news sting? Or have I just not been paying attention?

Amy Scott: You know, it was here when I was here last.

Kai Ryssdal: Bridget’s gonna yell at me. All right. Anyway, first of all, a voice message about taxes. Here we go.

Erin: Hi Kai and Amy, this is Aaron calling from Middleton, Wisconsin. And in response to your inquiry about tax refunds from last year. We just got our tax refund this past week. And the only reason we got our refund is because when we went to file our taxes, our accountant asked us if we had received our refund from last year. And in going through all of our banking records, found no record of it. So after filing some paperwork and doing a little bit of inquiry, we managed to get our tax refund just before we submitted our taxes for this year. Thanks for making me smart.

Kai Ryssdal: So two things. One, that’s actually – three things number one, that’s ridiculous. Number two, that’s what Congress wants to happen because clearly they have decided that people getting their tax refunds and processing the tax returns to get the money to run the government is not important enough, because they underfund the Internal Revenue Service. And number three, as I said Bridget yelled at me. Clearly I haven’t been paying attention to the mailbag sting. Because that is not a new one. That’s it.

Amy Scott: And we got this follow up from a conversation that Sabri and I had on Friday about Taco Bell.

Birak: Hi Make Me Smart, folks. This is Birak calling from Perrysburg, Ohio. I wanted to add to Amy’s and a brief discussion on Taco Bell. I’m a vegetarian myself, and I love Taco Bell, Amy I’m right there with you. I sub beans for every item on the toggle menu and the Mexican pizza is great. You should try it. Thank you.

Amy Scott: All right. So Kai, you were off but I confessed during our game show, which one were we doing Half Empty Half Full that I am a Taco Bell fan. A formerly closeted Taco Bell fan.

Kai Ryssdal: That’s the thing about this podcast you reveal pieces of yourself that you’re like oh wait, I didn’t really mean to say anything about that.

Amy Scott: Yeah, but you know what? I’m proud of it I am who I am. Birak thank you so much for sharing that I appreciate it.

Kai Ryssdal: Awesome. All right. Last thing before we go as we always do this week’s answer to the make me smart question which is once again, “What is something you thought you knew but later found out you were wrong about.” Here it is.

April: Hi, this is April and I live in San Diego, California. Something that I thought I knew but later found out I was wrong about was that Brontosaurus is actually a valid name for the long neck dinosaurs. I was reading a dinosaur comic book with my son. And it talks about how this archaeologists identified the Apatosaurus first, but it was a baby version skeleton. And then later he found an adult Brontosaurus and he named it Brontosaurus. But they were actually the same dinosaurs. But because a pad of Soros had been found first that is the official name, but Brontosaurus is actually acceptable. And I just thought that was interesting.

Kai Ryssdal: I think that is a good thing to know.

Amy Scott: Yeah, I feel so redeemed because I grew up with the Brontosaurus. When it came time to read my own kids books about dinosaurs. I was like, “What happened to the Brontosaurus.

Kai Ryssdal: Exactly.

Amy Scott: So thank you for sharing that April. That’s a good one.

Kai Ryssdal: That’s a good one.

Amy Scott: Yeah. All right. Well, keep sending us your answers. I love these via voice memo to our email at [email protected] Or you can leave us a message at 508-827-6278 also known as 508-U-B-SMART.

Kai Ryssdal: Make Me Smart is directed and produced by Marissa Cabrera. Our team includes producer Marque Greene and Ellen Rolfes, she writes our newsletters. Our intern is Tiffany Bui.

Amy Scott: Today’s program was engineered by Charlton Thorp with mixing by Mingxin Qiguan. Ben Tolliday and Daniel Ramirez composed our theme music. Senior producer is Bridget Bodnar. Donna Tam is the director of on demand and Marketplace’s Vice President and General Manager is Neal Scarbrough.

Kai Ryssdal: There you have it. Tuesday in the books. Tuesday in the books.

Amy Scott: Not a bad Tuesday.

Kai Ryssdal: Not a bad Tuesday at all. So far. I mean, it’s early out here.

Amy Scott: Yeah right.

Kai Ryssdal: 

Sorry ju