LOS ANGELES — Analysts predict that renting homes will continue to be a viable alternative for potential homebuyers in the coming year, largely due to high mortgage interest rates and escalating home prices.
Major real estate investment firms, such as American Homes 4 Rent and Invitation Homes, are expected to reap the benefits of this trend, according to insights from Mizuho Securities USA and Raymond James & Associates.
The core reasoning behind this outlook is straightforward: a significant number of Americans are likely to struggle in their search for affordable single-family homes, making rental options increasingly appealing.
The situation begins with mortgage rates. Although the average rate for a 30-year mortgage dipped to a two-year low of 6.08% in late September, it has largely trended upwards since then. This shift mirrors changes in the yield of the 10-year Treasury, which serves as a benchmark for pricing home loans.
This week, the yield has been around 4.4%, increasing following the outcomes of the presidential election. Investors’ expectations that the incoming administration’s economic policies could widen the federal deficit and elevate inflation have influenced this rise.
Raymond James analysts project that mortgage rates will persist at “higher for longer” levels due to the election results. They recently reaffirmed their positive outlook on American Homes 4 Rent and Invitation Homes, emphasizing their confidence in the longer-term stability of the single-family rental market and the sector’s growth potential.
These analysts also highlight that the two companies are well-positioned to benefit from increasing demand for suburban homes, particularly given the substantial difference in monthly expenses between renting and purchasing, which can be as much as 30% lower for rentals.
Mizuho analysts share a similar sentiment, indicating that ongoing challenges related to homeownership affordability will foster continued demand for rental properties, thereby aiding American Homes 4 Rent and Invitation Homes in retaining their tenants.
According to Mizuho, these firms are experiencing higher new and renewal lease rates compared to several leading U.S. apartment operators, including AvalonBay, Equity Residential, and Camden Property Trust. The firm rates American Homes 4 Rent as “Outperform” and has a “Neutral” rating for Invitation Homes.
In terms of market performance, Invitation Homes’ shares have decreased by 1.2% this year, while American Homes 4 Rent has seen a 4.4% increase. Both have underperformed relative to the S&P 500’s 24% rise during the same timeframe.
While most single-family rental properties are still owned by individual landlords and small investors, there has been a noticeable increase in homebuilders focusing on constructing new houses intended for rental communities.
In the third quarter alone, builders initiated around 24,000 new single-family homes slated for rental purposes, a significant increase from 17,000 the same time last year. Additionally, the second quarter saw single-family rental construction skyrocket to 25,000 starts, the highest quarterly figure recorded since at least 1990, based on U.S. Census data analyzed by the National Association of Home Builders.