Strong demand for starter homes turning big investors into developers

Amid a nationwide shortage of existing low-cost homes, rental companies are getting into the homebuilding game

(Credit: iStock)
(Credit: iStock)

As developers nationwide struggle to meet the demand for starter homes, some institutional investors are putting on their hardhats and entering the homebuilding market.

Companies such as American Homes 4 Rent and Tricon American Homes — which bought properties at distressed prices after the financial crisis to rent out — are now looking to build entry-level homes, according to the Wall Street Journal. By developing the properties themselves, the companies can maintain that business model — which has included renting out to families and people with low credit and high debt — and avoid running out of inventory.

Overall, home sales across the U.S. are slowing down, inventory is rising and listing prices on existing homes are falling. But in the lower-priced, entry-level home market, demand remains strong especially among millennials, according to experts.

Homebuilders are also being challenged by higher supply costs and a labor shortage that is preventing them from building homes quickly enough.

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In total, institutional investors have acquired more than 300,000 single-family homes since the crisis, according to the Journal.

Now, like other potential homebuyers, these rental home companies are struggling to find houses at affordable prices due to rising property values.

American Homes 4 Rent, based in Agoura Hills, California, has been constructing new homes throughout the Southeast. That’s in addition to its 52,000 rental homes across the country. Tricon American, a subsidiary of Toronto-based Tricon Capital Group, began including new homes in its portfolio last year, and has plans for hundreds more.

By building houses rather than acquiring existing ones, American Homes said it can control costs, avoiding sales commissions and renovations. [WSJ] — Keith Larsen