The shift of home stock from owner-occupied to rental status is a volatile one, ebbing and flowing with home prices, inventory levels, and market demand, according to a recent report commissioned by the Research Institute for Housing America (RIHA).
In his report “Owned Now Rented Later?” Syracuse University Professor of Economics Stuart S. Rosenthal analyzed U.S. Census data from 2000 to 2014, as well as American Community Surveys and American Housing Surveys from 1985 to 2013. This data brought to light a number of noticeable trends in when—and why—occupied homes transition to rental properties.
In general, Rosenthal found that homes are more likely to become rental properties as they age.
“Between 2000 and 2014, roughly 6.5 percent of homes built prior to 2000 and 10.3 percent of homes built in the 1990s shifted from owner-occupied to rental status,” the report stated. Additionally, “With each passing decade, on average there is a net transition of roughly 2 percent of the housing stock into the rental sector.”
Another big factor is the status of the owner’s current mortgage, with own-to-rent transitions more common when an owner is under water—or nearing that point.
“For homes modestly underwater, with current loan-to-value ratios (CLTV) between 100 and 120 percent, the own-to-rent transition probability is 1 to 2 percentage points higher than for comparable homes that are not under water. For homes that are deep under water, with CLTVs greater than 120 percent, the own-to-rent transition probability is 6 to 8 percentage points higher.”
If the underwater home is an in-demand property, the likelihood of it transitioning to a rental property is even greater.
“Further analysis reveals that these transitions occur primarily for housing types for which there is ample demand in the rental market. For underwater properties that have characteristics that limit demand in the rental sector, transitions to rental status largely do not occur.”
The report found that home prices also impacted the volume of own-to-rent transitions. This is likely because higher-priced homes lend themselves to more investment activity and, therefore, more purchases, Rosenthal reported.
“Findings also indicate that short run transitions of housing stock can be much larger in magnitude and are especially sensitive to changes in housing prices, with rising prices drawing rental units into the owner-occupied sector and falling prices having the opposite effect.”
When the former happens, the report suggested, it could undercut demand for new construction and drive buyers toward purchase previously rented properties instead.
“For the nation overall, notice that while home prices had returned to their 2007 peak as of 2016 Q2, permits for single-family building construction were still far below their 2005 peak and were down roughly 40 percent from 2000 levels.”
According to the report, much of the nation’s housing stock is still shifting toward the rental sector; this is likely a large factor in why new construction has seen a slow recovery since the housing crisis.
“The national homeownership rate has fallen almost continuously since 2006, reaching a low of just below 64 percent in the second quarter of 2016. On net, therefore, housing stock is likely still shifting towards the rental sector which makes it too soon to look for much reversal of post-2007 own-to-rent transitions of housing stock.”