Renting the neighborhood

Transcript:

Dr. Selma Hepp:

I wouldn't say that investor demand is disappearing. I think there's a shift. So, I would describe it less as a full retreat and more as a portfolio adoption. What I mean by that is during the same time, smaller and medium-sized investors have filled much of that gap. So we have actually seen an increase in purchases by small and medium-sized investors. That's why overall participation, like when you look at the share of overall purchases is going to investors remain elevated.

Maiclaire Bolton Smith:

‍Welcome to Beyond the Buildings by Cotality. I am your host Maiclaire Bolton Smith and I'm just as curious as you are about everything that happens in the property industry. On this podcast, we satisfy our collective curiosity, explore questions from every angle and look beyond the obvious. With every conversation, we illuminate what is possible. Recent headlines could lead people to believe that institutional investors have cornered the market on starter homes. Yet, others argue that rising interest rates and regulatory pushback have forced a total retreat of mega funds. But if you look past the noise and examine the hard property level data, a much more nuanced story emerges. Institutional capital hasn't totally retreated from the single family housing market, but it is shifting. High prices and a severe lack of resale inventory has forced investors to rewrite their playbooks. They're shifting away from traditional entry level resale homes and moving directly onto new construction, town homes and built for rent communities. Some are even dipping their toes into the luxury market. So, to help us separate the facts from myths, we have two of the country's leading housing experts with us today,'s chief economist Selma Hep and John Burns, founder and CEO of John Burns research and consulting. Selma and John, welcome to Beyond the Buildings.

John Burns:

Thank you.

Dr. Selma Hepp:

Hi Maiclaire, thanks for having us.

Allie Barefoot:

Before we get too far in this episode, here's a friendly reminder about how to see what's coming up next in the property market. To make it easy, we curate the latest insight and analysis for you online. Find us using the handle @Cotality on all of our social media channels. But now, let's get back to the show.

Maiclaire Bolton Smith:

Okay, well I'm really excited to dive into this with both of you. So Selma, let's start with you. If we look at the headlines, the media frequently reports that institutional mega funds are purchasing portfolios of single family homes, limiting opportunities for the individual buyers. But if we look at the actual data, what is the real footprint of these large scale buyers today?

Dr. Selma Hepp:

Yeah, thank you for the question, Maiclaire. The headlines do indeed tend to overstate the role of large institutional investors or institutional buyers. Mega investors are highly visible, but they actually remain a relatively small share of the overall single family market. When we look at actual overall investors, they do account for about three in 10 single family home purchases and that's been the case for about a few years now. The share actually also increased over the last few years. So in first half of 2025, investors share was 32%. In January, where it went out to 29% in January, and increased backup. So it's, you know, it's generally been above 25%.

But the composition matters. Small investors with fewer than 10 properties accounted for about 14% of purchases, while media investors did rise from 6 to 10% over the course of last year. And then we have large investors that are actually closer to 3% and then the mega investors, those are investors with thousand properties or more, they're only about 2 to 3%. So you know, the concern is that the real buyer are competing against cash offer, the real buyers and the traditional buyers, especially in the entry level segments, but the data showed a more nuanced picture, right? So the large institutional investors are not necessarily cornering the national market. They are concentrated in specific metros and then they're the story, you know, that's actually going to evolve throughout this this podcast probably is that they're increasingly shifting their strategy to build to rent rather than simply buying every single starter home.

Maiclaire Bolton Smith:

I mean that's why we want to have the conversation today is because this goes far beyond the headline once you dive into the data and I think that's that's what we do want to kind of talk about how the pattern is maybe shifting a little bit. So John, I want to turn to you. So the resale market really kind of remains locked behind the mortgage rates of years gone by where we had these low rates. Um and we're starting to see a shift of interest to new construction. So how are builders and institutional investors now partnering to expand the built for rent market and why has this now becoming their preferred asset class?

John Burns:

This is what the world gets wrong and I'm guessing the world is not listening to this. So, the Road to Housing Act has a cap at 350 homes. It's not the companies above 350 that are causing any of the problems that Selma just articulated. It's everybody else which are probably the people listening to this podcast who are investors on their own, who are fixing and flipping homes. Just be glad Congress didn't figure out it was you. That was most of the ones that were competing with the homeowners. I think people just completely missed that. And then secondly relate related to that is yeah, so capital and we have a lot of capital clients who invest in scattered homes and do the built to rent. Uh once interest rates rose buying existing homes and running them out no longer made sense for them as a decent yield because the yield requirements went up. So, they stopped. But what they stumbled into was this this term called built around is the number of people that rent homes is about 40% as large as the number of people that rent apartments. So, it's a big

Maiclaire Bolton Smith:

Wow, that's huge.

John Burns:

Yeah. 12 million homes and this has beengoing on for decades as a percentage plus or minus 10 to 12% of all the households in America. But nobody ever built rental communities for these people. And instead, now you can rent from a landlord that you can vet online before you rent from them, who will maintain your yard, where all your neighbors are renters too. It's really a great opportunity and nobody had done this before and the single-family rental guys figured out coming out of this that like, oh, this is a there's a huge consumer demand here. We're going to build for this and that's what Congress was trying to stop in the latest act, but that got that got struck out. So anyway, that's why they shifted to new construction. Now that's had his challenges too because new construction is 50% more expensive than it was six years ago just from construction costs.

Maiclaire Bolton Smith:

Because the construction costs, yeah.

John Burns:

Requirements are up there too and a couple submarkets were relatively easy to get approval. so there's too much supply on the market in those submarkets so people are struggling there. I think this is got to be a growth industry for decades.

Maiclaire Bolton Smith:

Yeah, it sounds like it probably is and you know, John, I know your team tracks you and your team track the housing starts along with home prices, um and look at this kind of incoming supply and is that why? Is that so that you can analyze where investors may potentially be looking at these now built for rent communities because they are the ones that are currently, you know, new houses that are being built?

John Burns:

Housing starts is a piece of the puzzle. It is the competitive supply piece. So if you're going to build a compete community, you don't want three competitors right across the street. so we do try to carefully vet whether or not that's going to happen. That's been super tricky because with built to rent because some of the home builders have bought homes intending to sell them and then flip some of them to rental communities. So you kind of thought they were going to be for sale and then they became for rent. There's a usually very specific local dynamics associated with that. Probably because on those particular projects, the rental demand was higher than the for sale demand.

Maiclaire Bolton Smith:

So I guess you trigger a thought, John, like I I look at different neighborhoods that I've lived in and there's always been a number of rental properties, you know, in the neighborhood. That's just how it has always been prior to, you know, us buying the homes that we've lived in, you know, when I was an adult, not, you know, still a single adult but out of school and you know, a grown-up, I didn't want to live in an apartment. I wanted to live in a home and I rented a home in a nice community. That's not going to go away. So even if investors are do move towards this potentially, you know, built for rent communities, that's not necessarily taking away these what the the smaller investors may gravitate to is just as you said, you know, buying a home and and flipping it and it becoming a rental property. You know, something that we've talked about on this podcast before, Molly Boesel and I have talked on this podcast about accidental landlords, people that don't intend to ever be a landlord, that's not going to stop. That's going to continue as well. It's just potentially creating another outlet or inlet, I guess you could for these larger investors to have these built rent communities. Is that is that true?

John Burns:

Yeah, and that's very true. and I'm going to say that number is going to grow because people are sitting on a 3% fixed rate mortgage. They can buy another home and rent out the current home and keep that mortgage. More and more people are doing that. So those are the quote, unquote accidental landlords.

Dr. Selma Hepp:

Yeah. No, I I was going to actually as as John said, riff off of that and say, you know, why the new construction matters so much too at this point in the cycle is that existing market is so constrained by this locking effect. So we're paying more and more attention that why that question around data, you know, which data are we tracking is so important because it is now uh you know, that's what tells us where the wave of new supply is going to come from, you know, regionally and both by type of housing. So it's now becomes so much more important.

Maiclaire Bolton Smith:

Well, and Selma, I mean that's exactly where I wanted to go is, you know, still looking at this lock-in effect about people being locked in on their not wanting to get out of their low mortgage rates that they have. A lot of first-time buyers are in a very tough market. So how do we see kind of the the dynamic playing out long term because we've got these home buyers competing with investors looking for properties. You know, will we ever have enough single-family homes to satisfy the demand from both sides in this country?

Dr. Selma Hepp:

Well, that's really the issue, you know, the long-term issue is that the first-time buyers and investors are competing in a market that simply has too little attainable supply and and that's pushed the prices so high that it's made it so unaffordable for the first-time buyers to come in. Because we have the type of homes we have built meaning larger and more expensive homes, the competition is more intense for the smaller, older entry level homes. These are the homes that usually helped renters transition to home ownership. This is where really that intensity from both sides come comes from.

John Burns:

Well the home builders have a solution to that and it's working very well. They're at um the home builders have such strong balance sheets and so much cash, they're able to buy down the mortgage rate. I mean they're literally writing checks for tens of thousands of dollars to the mortgage company and getting the consumer a sub 5% 30 year fixed rate mortgage forever which helps a lot. And that was easy to do a couple of years ago when the builder profit margins were very high. Now they've gotten below norm and they're finding that's the only way to sell houses. So it's really for new homes, it's become a buyer's market. The home builders are achieving below normal profit margins or some of them are even losing money. But you can get a30 year 5% fixed rate mortgage on a new home.

Maiclaire Bolton Smith:

Wow. Well, yeah, that's interesting and in this market where interest rates are still high and not really a lot of indication of coming down, uh that's a way around it. It really is kind of a way around getting a lower interest rate. So it's very interesting to see that that's becoming so popular.

John Burns:

Yeah it's yeah, it's it's almost everysingle entry level home in the country right now the builders offer that.

Maiclaire Bolton Smith:

Wow, that's very interesting. Um John, I know Selma's team, you know, you look at a lot of our data all the time here and the data that Selma and her team pull, but they've uncovered something specifically in Texas, um and it's that attached living spaces liked town homes are really kind of catching the eye of investors. What is it about this type of construction that's becoming so so important right now.

John Burns:

Yeah, so these rental communities um some of the homes are detached but that's actually probably the minority. Um a lot of are attached because that you know, this is all about the builders making money and they're finding they don't get a premium, that big of a premium for being detached, they don't get a big premium for a yard. It makes more financial sense for them to do like a town home or duplex which kind of feels like a single family home but maybe you're just sharing one wall but you've got nobody uh walking upstairs above you. And uh that's the product that they're finding works better in their financial pro forma and um so they've been building more of that in Texas. And frankly in some sub markets they built too much of it and the market is renting is quite soft there right now because as Selma said, there's a lot of it.

Maiclaire Bolton Smith:

Yeah. Is that exclusive to Texas or Texas just stood out? Did do we see that in other areas as well?

John Burns:

Phoenix definitely the same thing.

Maiclaire Bolton Smith:

Okay. Is it because those are two areas where the new construction boom has been so high?

John Burns:

Uh I think that's right and I think it's easier to get your permit particularly in Texas than in some other areas and so yes.

Dr. Selma Hepp:

Yeah, I would definitely agree that areas that where it's easier and say relatively cheaper to build, you'll get a lot more, you know, a lot more types of homes and in numbers in terms of numbers.

Maiclaire Bolton Smith:

Interesting.

Allie Barefoot:

Enjoying the conversation, dive deeper with a session that separates facts from fear. Our latest webinar will look at how regulations around investors are evolving, why institutional investment is reacting and how the markets are poised to change. We'll also dive into how to leverage advanced hyper local data to evaluate asset performance, mitigate hidden risks and out-maneuver less informed competitors. Watch the webinar on demand. Find the link in the show notes.

Maiclaire Bolton Smith:

So John, I guess let's stay with this geography of investment and you know, when we look at the different regions, some of them are really hot, building lots of, you know, built for rent expansion areas, while other areas remain really quiet. Are there specific metropolitans that stand out to you on both sides of both being like really high growth areas for the investor market, whereas some may face an over supply from all this building?

John Burns:

Yeah, so there are a lot ofenrepreneurial development companies in Arizona and Texas. So that's where they were headquartered and that's where they got started. So we saw a lot of built to rent particularly in Arizona first and then in Dallas. And some of those markets are just flat out overbuilt because people had early success and so they said, well you know, two projects went well, I'm gonna do 10 more and now we've got dozens of projects competing with each other and it's oversupplied with certain product type in certain markets. I should mention BTR [Built to Rent], I said earlier, they're about 40% as many people that rent single family homes as renting apartments. They lease up at about 40% the same rate too. So if you're used to doing an apartment and performing 20 a month, maybe you're going to get in the same neighborhood eight a month on BTR. It's just a slower lease in process. And so they're really struggling.

Maiclaire Bolton Smith:

Okay. Interesting, that's interesting. Okay, Selma, I want to pivot a little bit. I want to talk about legislation here. So we've seen several legislative proposals aimed at restricting institutional single family landlords. So from a policy standpoint, are these regulatory threats actually causing investors to pull back or are they simply just adapting their their portfolios and adapting their strategies to avoid any political headwinds?

Dr. Selma Hepp:

Yeah, that's actually a great question. So, you know, we we've been tracking this data very care carefully since the announcement of the ban and in our data, uh when the ban was announced in early January, we did see purchases by mega investors drop off significantly. They fell from about 250 purchases a day to about 100.

Dr. Selma Hepp:

I wouldn't say that investor is demand is disappearing, I think there's a shift. So, you know, I would describe it less as a full retreat and more as a portfolio adoption. What I mean by that in during at the same time, smaller and medium-sized investors have filled much of that gap. So we have actually seen an increase in purchases by small and medium-sized investors. and that's why overall participation, like when you look at the share of overall purchases is going to investors, remains elevated. It's still at three out of 10 homes, but it's now increasingly more uh comes from um small and medium-sized investors. So, it's not the case that large investors are moving away from scattered uh site resell acquisition and fully towards new construction or build for rent community or and whatever, but it's it's how they're breaking up their investments. The challenge here, you know, in terms of the policy is, you know, how do we protect home ownership opportunities without unintentionally reducing the rental supply or reducing or discouraging new housing construction, which is what John was talking about a lot. So, you know, we need to sort of um, you know, ensure that we have an ample home ownership opportunity while at the same time having ample rental supply and continuing to build new communities and new housing.

Maiclaire Bolton Smith:

Wow, that's interesting.

Allie Barefoot:

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Maiclaire Bolton Smith:

So, Selma knows, I like to close these with looking into your crystal ball. So John, I hope you have a crystal ball too. Um we're not going to look too far into the future. Uh how do we think by 2030, so just a few years down the road, how do we expect this relationship between institutional capital, home builders and individual homeownership to continue to evolve. John, why don't you go first?

John Burns:

So interestingly and this has not been reported on very much, institutional capital starting a few years ago rotated a lot into helping people flip homes. They call them residential transition loans. You're seeing a lot of big institutions helping local folks buy a sub buy some homes, fix them up and flip them and that is a growing business and going very, very well. So I think that that continues. Uh the home builders have changed their game to be doing more off balance sheet financing with land bankers, which is a it's basically a type of financing where they get somebody else to own the lots until they actually need them and so they're there's a lot of capital there and I expect that to continue for some time even though it is expensive, it's a better return on equity which is what the public markets want. And then yeah, and then I think individual home ownership has already faired a lot better than you would think given the headlines and the affordability issues and I think that is going to continue primarily because people are getting a lot of help with their down payment and a lot of the first-time buyers, their parents are are helping them and their parents generation has an 80% home ownership rate. So that means 80% of them have parents who just made a lot of money with all the home price appreciation and they're getting a fair amount of help and then some of that will show up in an inheritance too. So, um, although they're going to buy homes later, I'm not bearish on home ownership in this country at all and I don't believe a lot of my clients in the rental business who say like people don't want to ever own.They may tell you that, but at some point, I think the same percentage of people as always is going to end up owning a home.

Maiclaire Bolton Smith:

Yeah, just maybe later in life than your parents did. Interesting. Yeah. Selma, your thoughts?

Dr. Selma Hepp:

Yeah, I mean I think my builds pretty much on what John said. Institutional capital I think going forward maybe less so a home buyer and more so a housing production partner, if I could call it that way. And then builders become a primary conduit for deploying that capital. The future home ownership will be less impacted by investor activity itself and more on whether the industry and policy makers can successfully increase the supply of attainable housing, you know, because I think that's still the underlying uh constraint in the in the in the uh in the in the US housing market is attainable, affordable housing.

Maiclaire Bolton Smith:

Yeah. I mean, ultimately the American dream has not changed. People are still going to want to be homeowners, see it as a way of growing equity in one way or another, it just might happen at a later time.

John Burns:

Yeah. I mean we see it all the time.three rent hikes in a row, people want to become a homeowner.

Maiclaire Bolton Smith:

Yeah. Yeah, absolutely. Well, this has been so interesting. Selma, John, thank you so much for joining me today on Beyond the Buildings by Cotality.

Dr. Selma Hepp / John Burns:

Thanks for having us. Thank you.

Maiclaire Bolton Smith:

All right, and thank you for listening. I hope you've enjoyed our latest episode. Please remember to leave us a review and let us know your thoughts and subscribe wherever you get your podcast to be notified when new episodes are released. And thanks to the team for helping bring this podcast to life. producer Jessi Devenyns, editor and sound engineer, Romie Aromin, our facts guru, Allie Barefoot and social media duo, Sarah Buck and Mikaila Brooks. Tune in next time for another conversation that illuminates ideas that will define the future.

Allie Barefoot:

You still there? Well, thanks for sticking around. Are you curious to learn more about our guests today? John founded John Burns research and consulting in 2001 to help business executives in the housing industry make the most informed investment decisions possible.His team of pals, passionate, articulate, likable and smart people, in locations all over the country, solve today to help the company's research subscribers and consulting clients navigate tomorrow by understanding housing demand, supply, affordability, building materials and design trends. Dr. Selma Hepp is Cotality's Chief Economist. Selma leads the economics team, which is responsible for analyzing, interpreting and forecasting housing and economic trends in real estate, mortgage and insurance. Selma frequently appears on local national radio and television programs and has been widely quoted in the Wall Street Journal, the New York Times and many industry trade publications. She also regularly publishes on the insights page. You can find her work at Cotality.com/insights.

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