Key takeaways
- Home affordability in the U.S. is decreasing amidst an increase in mortgage rates and prices, while demand for shelter remains elevated especially in the southeast and southwest.
- As the spike in prices makes homes increasingly out of reach for potential buyers, the appeal of built-to-rent opportunities grows.
- Yieldstreet is offering investors access to different types of real estate investments, partnering with local partners with knowledge of the market and boots on the ground.
The tightening market for single family homes
The U.S. residential housing market has been buoyant for the past fifteen months, supported by a pandemic savings glut, low interest rates, as well as increased demand for previously underdeveloped areas, as more people moved out of large cities.
The mismatch between increasing demand and dwindling supply created market imbalances. Since January 2021, there has been a 36% increase in the homeownership cost to income ratio, a spike similar to the one that took place between 2003 and 2005 – except the timeframe was much shorter this time around (18 months versus three years). Homeownership cost is now at 38% in the US, on par with levels reached in 2005 – the highest since 1985.
Most housing markets in the country are considered to be “very overpriced” according to proprietary research. At a national level, the delta is 24% above fair value.
With the market at record levels, the Federal Reserve started tightening monetary policy to tame elevated inflation. The spike in short-term rates – alongside persistently high inflation readings – pushed the long end of the Treasury curve also higher which, in turn, produced an increase in fixed rate mortgages from around 3% to above 5%, and is now contributing to cooling down individual demand for housing.
While there is still excess demand to buy homes – listings in March 2022 remained lower than ever (below 400,000) and 19% beneath March 2021 – most analysts expect this to change in the near future.
Enter built-to-rent
Even with real estate becoming less affordable – especially in overheated markets around the country – individuals still need shelter. The ones who cannot afford buying a home will have to turn to renting, which may experience an increase in demand going forward, as the effects of higher mortgage rates start to materialize.
Aside from the cyclical argument, there is a more structural argument revolving around homeownership in the U.S., which is currently at 66% and is expected to keep declining during the next 20 years.
The “built-to-rent” business model dates back to the 1980s, and became popular after the 2008 financial crisis. Known as build-to-rent (BTR), single-family rental (SFR) and single-family-built-to-rent (SFBR), this form of real estate investment is attracting significant interest and capital.
In June 2021, the Wall Street Journal quoted numbers from Hunter Housing Economics, stating that 6% of the homes currently being built in the U.S. are BTRs. Hunter went on to predict that the number of BTRs built annually will double by 2024.
At the same time, the increase in rates can also produce headwinds for investors, as sourcing becomes difficult due to an increase in cap rates, and higher interest rates makes financing more expensive.
Yieldstreet and real estate
Yieldstreet’s real estate investments are structured as a joint venture between Yieldstreet and a well-known general partner that has knowledge of the market, boots on the ground, and contacts among local contractors.
When it comes to geographies, Yieldstreet scrutinizes U.S. regions searching for what it believes to be the most potential for growth and resilience to downturns. As of 2022, these markets are located in the southeast and southwest – specifically, in 2021, Florida was the area with the largest year-over-year residential housing appreciation. The southeast as a whole posted 24% gains. At a local level, there can be additional trends to watch, such as growth in business and economic activity, upcoming public investments – new manufacturing plants such as this one can be a telling example – and growing commercial traffic.
All information sourced from John Burns real estate consulting.
1. The ratio is total housing costs (mortgage, property taxes) on the median priced home for someone getting a 90% loan-to-value mortgage earning 125% of median income.
2. “Very overpriced” means more than 20% above fair value.
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