A big Wall Street firm is betting that America is likely to become the United States of Renters.
On Thursday, private equity behemoth Blackstone announced a major merger of its own Invitation Homes Inc. with another company, Starwood Waypoint Homes. It’s the kind of news that makes most people’s eyes glaze over. But after the deal is done, Invitation Homes will be America’s biggest landlord of single-family homes, owning more than 82,000 houses, mostly in major cities like Chicago and Miami.
In plain speak, this means a top Wall Street company and a top real estate company think there’s a lot more money to be made renting property to Americans who either can’t afford to buy or don’t want to become homeowners.
“This merger creates the leading single-family rental company in the United States,” said Fred Tuomi, chief executive of Starwood Waypoint Homes. He called it a “win-win for both residents and stockholders.”
Homeownership in the United States hit a 50-year low in 2016. It’s sparked a big debate in economic and cultural circles: Is the American Dream of owning a home dying? Or is this just a temporary blip?
The New York Federal Reserve keeps reminding people that Millennials (among others) are so saddled with student loan debt that they aren’t able to buy homes as have past generations. So there’s an economic reality holding back home buying. Home prices have also been rising far faster than incomes, especially in cities like San Francisco and New York.
Cultural shifts are also underway. In surveys, Millennials often say they want to own homes one day, but they are a generation that’s embraced the “sharing economy.” They don’t like to own much. They take Lyft and Uber instead of owning a car. They tell their parents and grandparents “no thanks” when they are offered the family china or trinkets. They prefer to spend their money on experiences — eating out, concerts, travel, gyms — instead of stuff.
The head honchos at Blackstone, Invitation Homes and Starwood are making a clear vote about what they think the future holds: More renters. These aren’t cheap homes. The average rent is just over $1,600, according to Starwood. Renting is going upscale. Homebuilders and realtors, however, think they are too pessimistic about the American Dream.
“I don’t buy that homeownership rate is stuck at a 50-year low,” says Lawrence Yun, chief economist at the National Association of Realtors. At the moment, 63.7 percent of American households own their own homes. In the peak days before the financial crisis, over 69 percent owned homes. That might not sound like a substantial difference, but it means that about 6 million more families would own homes now if the rate were still at peak levels.
Yun predicts the homeownership rate will climb back to 65 percent in the two years. “It will come back upwards as long as the economy continues to generate jobs,” he says.
There’s a simple solution to the affordability problem: Build more homes. That should drive down prices.
But Tuomi, the CEO of the merged company, told CNBC Friday that homebuilders can’t find enough construction workers. People don’t seem to want to do those jobs anymore (at least at the current wages). The result is homebuilders haven’t been able to build new homes fast enough. Once again, that plays right into the big landlord’s hands. It’s why the average rental price in the United States has jumped about 30 percent since 2013, according to Census data.
“We simply cannot add enough construction workers to industry fast enough,” admits Robert Dietz, chief economist at the National Association of Home Builders. “When builders put up homes, they are able to sell them.” He also notes that home builders continue to report they can’t get permits fast enough to put up new homes, especially the townhomes that would be affordable to first-time homebuyers.
Still, Deitz also believes conditions are right for home building — and buying — to rebound.
“The demographics are right,” Dietz says. The average age of a Millennial right now is 27 or 28. “Typically, the median age of first-time home buyer is 30 or 31.” Dietz predicts Millennials will start to “nest” like their parents and grandparents and that will drive the homeonwership rate up a bit.
The bottom line: Keep an eye on whether more companies follow Blackstone’s lead.